Graduation day and commencement are just around the corner. If you’re a new graduate, or about to be one, donning a cap and gown signifies the end of that challenging and memorable four-year journey called college.
After graduation, you might be starting your first full-time job, renting an apartment in a new city and maybe even buying a new vehicle. Either way, you’re going to have a new monthly bill — your student loan payment. In 2015, the average recent college graduate had $35,000 in student loan debt and the 2016 projection is only going up at $37,000, according to Mark Kantrowitz publisher of Cappex.com.
The prospect of paying off student loan debts can seem overwhelming. However, student loans can be paid off quickly and without getting into further debt in the process. Here are some tips from student loan experts on how to make headway right away on that monthly student debt loan payment.
1. Ignore the Grace Period
Many loans have a grace period, which is a short period of time in which no loan payments are required. A few factors play into how long the grace period is on a loan, including what type of loan it is and if the student is active military or consolidating loans. As a general idea though, direct subsidized loans have a grace period of six months.
Some students might think of their loan grace period as a way to catch a break and get their finances in order following graduation. However, this time can be used to dive into loan repayment immediately and get ahead of your debt. “Interest accrues during the grace period, so it is better if you can start paying back the loan earlier,” said Mark Kantrowitz of Cappex.com, a free web site that connects students with colleges and scholarships.
Using the $35,000 student loan average, and a modest interest rate of 4 percent for 10 years: If a student decides to begin paying on the loan immediately and cut six months off the term of their loan, the total amount of interest paid on the loan will be reduced by roughly $400.
2. Double Up on Student Loan Payments
There is no rule against paying more than the minimum balance due on student loans. Take advantage of this opportunity to pay down loans faster. “Double up your payments if and when you can or pay more than your minimum payment,” said Leslie Tayne of Tayne Law Group. “In order to pay more toward the principal of your loan and not just the interest, you should consider doubling up on your payments so you can pay off your loans quicker.”
You want to make the second payment as close as you can to your monthly payment because it will be the lowest interest accrued, Tayne said. “If your loan is $300 every month to be paid on the third then you might want to consider paying an additional $100 on the fourth of the month, if you’re able to,” she said. “In making your additional payment the following day, there will be only one day of interest accrued.”
Additionally, if you make bi-weekly payments every month, you will see begin to see your loan amount decreasing a lot quicker, she adds. “For example, depending on how much money you are putting toward your bi-weekly payment, you could cut your student loan repayment term in half by making bi-weekly payments,” Tayne said.
3. Pay Off Loans With the Highest Interest Rate First
If you have multiple student loans, there are a few different ways to approach repayment. Some graduates opt to pay the smallest loan off first — this is the debt snowball method. However, paying off the loan with the highest interest rate first might save a little more money in the long-term. This method is called the avalanche method.
“If you can afford to make extra payments on your student loans, target them at the loan with the highest interest rate. This will save you the most money,” Kantrowitz said. “[S]pecify that this is an extra payment that should be applied to the loan with the highest interest rate and not as an early payment of the next installment. You want it treated as an extra payment in addition to the regular installments, not instead of them.”
For example, if you have a $10,000 loan at 3 percent interest with a 10-year term, and you only make minimum payments, you will pay about $1,500 in interest. Alternatively, a $5,000 loan at a higher 15 percent interest with a 10-year term will cause you to pay almost $4,700 in interest.
4. Deduct Your Student Loan Interest From Your Taxes
Each year you pay off your student loans, you’re paying a lot of money on student loan interest. So each April, make sure you take advantage of the Student Loan Interest Deduction on your federal tax return.
“The student loan interest deduction lets borrowers deduct up to $2,500 a year in interest on federal and private student loans, reducing your tax liability by a few hundred dollars,” Kantrowitz said. “The deduction is taken as an above-the-line exclusion from income, so you can take it even if you don’t itemize.”
5. Consolidate Loans If Conditions Are Right
Consolidating your student loans could be beneficial — but only if the conditions are right. “Consolidation of student loan debt is a good idea if and when you can find a loan that has a fixed and lower interest rate than the one you have now,” Tayne said. “You should try consolidating your loans if your interest rates are variables. You might also want to consider this option if you need a lower monthly payment.”
However, there are also some circumstances in which consolidation is not the best idea. “If you are consolidating your federal loan into a private loan, you really should let the federal loans ride out and pay off as much as you can, when you can,” Tayne said. “[Consolidating federal loans] can end up with you losing money in the long haul, because it will most likely turn from a fixed interest rate to a lower interest rate that is not fixed, which is always risky.”
6. Sign Up for Automatic Debit
Always sign up for an automatic debit of your student loan payments, so you don’t miss a payment. “[Automatic debit is when] monthly payments are automatically transferred from your bank account to the lender,” Kantrowitz said. “Not only will you be less likely to be late with a payment, but many lenders offer slight interest rate reductions as an incentive.” This interest rate reduction can be as much as 0.25 percent on federal loans; and from 0.25 to 0.50 percent on private student loans, said Kantrowitz.
Using the $35,000 student loan example: If automatic debit is used during the entire life of a 10-year loan, reducing the interest rate from 4 percent to 3.75 percent, you could save $500 over the life of the loan in interest payments.
7. Consider Prepaying Loans With Extra Cash
If you are close to graduating, but still have a semester or so left, you can get ahead even easier. For example, if you took out a loan to pay for tuition at the beginning of the school year, but are working at the same time or otherwise have a means to begin making small payments on the loan before graduation.
If you prepay your loan by paying it off as you go, this will reduce your total interest paid. And since the balance of the loan will be reduced as well, more of your monthly payment will go toward the actual balance instead of mostly toward the interest.
8. Ask Your Employer to Help
Roughly 3 percent of employers have programs in place to help aid recent graduates with paying back student loans, according to the Society for Human Resource Management. For example, PricewaterhouseCoopers (PwC) offers up to $1,200 per year for up to six years to help their employees pay off student loans.
“Ask your employer to provide employer-paid student loan repayment assistance as an employee benefit,” Kantrowitz said. “Many large employers, including PwC and Fidelity, have started offering such benefits, or are considering adding such a benefit.”
9. Pick the Best Student Loan Repayment Plan
Be wise when picking a plan to pay back your student loans. “Every student loan borrower will have the ability to select from several repayment plan options,” said Paul F. Goebel, director of the University of North Texas Student Money Management Center. “Pick a plan that meets your financial situation immediately following graduation. A plan’s repayment obligation should be manageable and not create a financial hardship.”
You will even have the opportunity to change plans if needed. “As your discretionary income increases you might choose a different plan that allows you to pay off your loan obligation faster,” Goebel said. “Paying your student loans back quicker will also help you save money from the impact of accruing interest.”
Some payment plan options are “pay as you earn” and based on the amount of income a student has following graduation. However, this option won’t typically save the most money. You could pay $15,000 more over the course of a loan if you take this route, than with other re-payment options, according to U.S. News World & Report.
Paying off your student loans after graduation doesn’t have to be a headache. By making payments early and often, and by strategically paying loans down according to their interest rates, it’s possible to pay student loans early. Just follow these expert tips and you’ll be well on your way to being free of student loan debt.
Keep Reading: 9 Ways to Pay Off Student Loans Before Your 30s