The need for a college education has been increasing over the years, which has led to more students enrolling in college, despite rising fees. This has resulted in most, if not all of the students, incurring some kind of student loan debt. While colleges and loan offering companies are very forward with offering student loans, not many of them tell you how to pay off student loans.
A number of students try and pay off student loans during their studies. However, the average loan amount can go up to $30,000 to $40,000. For post-graduate and higher studies, it may even reach over $1 million. Working to pay all that amount back can be difficult, but it can be done smoothly if you know your options.
The following are four ways on how to pay off student loans so you can focus more on your financial standing and improve your personal finances in the process.
Consolidation of Student Loans
Loan consolidation means that you combine all your current loans into one. In technical terms, you combine all of your current federal student loans into one Direct Consolidation Loan. An important factor to note is that loan consolidation only works with federal student loans and not private student loans.
Loan consolidation has no reduction effect on the interest rates or your monthly payments. Consolidating your student loans just removes any redundancies in repayments, so you don’t have to repeat the process for different repayments. Combining all your federal loans into one consolidated loan ensures that you only make one single payment.
However, your interest rate is reassessed and calculated according to the weighted average of all your current student loans, which is then rounded up to the nearest 0.125%. This means that your interest rate may even increase, to some extent.
Refinancing Your Student Loans
Refinancing student loans is one of the most popular ways to pay back your student debt. This is done by combining all of your existing private and federal loans into one single loan, which has a lower interest rate compared to the individual interest rates.
For a refinanced loan, you can choose a repayment time of between 5 to 20 years and can opt for either a fixed or variable interest rate. If you have plans to pay the loan back in the long-term, you should go for the fixed interest rate, as it will remain the same even if interest rates shoot up five to ten years later.
With refinanced loans, you will only have one student loan servicer and will have to make a single payment per month. However, to get approved for refinancing, you need to have a job, or proof of employment, work experience, a history of financial responsibility, a good income, and a strong credit score. When you do refinance your student loans, you give up your right to benefits such as deferrals and forbearance.
Make One Lump Sum Payment
If you want to get rid of your student loans quicker, and have the financial means to safely do so, you can make additional payments, on top of your regular monthly payments. Similarly, if you aren’t able to pay the monthly amount, you can choose to pay a lump sum at a later point.
You will need to contact your student loan servicer and develop a plan. You will also need to explain what your extra payments are for, and for which monthly payment.
Keep in mind that you need to improve your personal finances. Therefore, if you have any other kind of debt, such as a mortgage or credit card payments, with a higher interest rate and balance, you should focus on paying those loans back first. Or, you can contribute the funds to a retirement plan and invest it for good returns.
Increase Your Monthly Payments
Increasing your monthly payments may seem like an antithetical decision, but if you break down the pros and cons of it, you will find out that it’s one of the best decisions you can make. You can understand this better by imagining increasing your monthly payments by just $100. You will find that in the long run, this will reduce years of repayment.
The Bottom Line
Anyone in debt needs to develop a proper repayment strategy to pay back their loans effectively. Student loans are one of the most common loans today since an increasing number of people are going to college. That’s why companies are also developing employee benefits to help employees pay back their student loans.
Having a proper loan repayment strategy ensures that you have your personal finances in control. And if you understand how to pay off student loans, you can further improve not just your personal finances, but your overall quality of life.