According to the Consumer Financial Protection Bureau (CFPB), the combined total for federal and private outstanding student loan debt reached approximately $1.2 trillion in 2013. At the same time, the median household income in 2013 was 8 percent lower than in 2007, the year the U.S. entered the recession.
For millennials, facing student loan debt can be a daunting task, says Heather Jarvis, a public interest lawyer and consumer advocate. Jarvis is Chair for the Committee on Government Relations and Student Financial Aid, and is a frequent contributor to the student debt relief policy for the House Education Committee and others in Congress.
“You need to prioritize your student loans, but this will be very difficult for today’s students because of the varying interest rates and economic climate,” Jarvis says.
Putting off your loans could cost you thousands of dollars in interest payments. Jarvis recommends the following five ways to pay down your loans faster:
1. Create a student loan inventory.
Keep track of everything you owe so you can evaluate the varying loan terms. If you have several types of loans, make sure to include in your inventory the type of loan, the interest rate, the repayment period, and how to contact the loan servicer.
You can find a list of your federal student loans on the National Student Loan Data System (NSLDS), the U.S. Department of Education’s central database of student loan information. For private loans, you can order a free copy of your credit report from each bureau from AnnualCreditReport.com and compare it to the NSLDS list, or visit Equifax.com for products that can help you monitor your credit file. Your private loans will appear only on your credit report, whereas your federal loans will appear on both the NSLDS list and your credit report.
2. Calculate the cost of interest.
If you are facing years of paying off student loan debt, it can be hard to imagine how much the interest will cost you. By running the numbers, you can see exactly how much you can save if you pay your debt faster.
For example, if your loans total $50,000 and you have an interest rate of 6.8 percent, you would need to make monthly payments of $462.21 in order to pay off your loan in 14 years. When you finally pay it off, you will have spent nearly $28,000 in interest.
However, if you wanted to pay off the same loan in seven years instead of 14, your monthly payment would need to increase to $749.75—but you would pay about $12,979 in interest, saving you $14,672.35 over the life of the loan.
3. Make extra payments toward the loan principal.
After you know what you owe and how much the interest can cost you, start tackling your debt by making extra payments toward the loan’s principal. In the previous scenario, just two extra payments every year would save you $2,056 in interest over seven years.
But you “can’t just send in a lump sum payment and believe it will automatically reduce your principal,” Jarvis advises. You need to instruct your lender, in writing, to apply the extra payment toward the principal. On its website, the CFPB provides a language that you can use to let lenders know how you want extra payments applied to your debt.
Be aware that lenders typically apply your payments toward the accrued interest, collections, or fees before they apply it to the principal. If you have deferred your loans or are using an income-based repayment plan (a plan that bases your monthly payment on your discretionary income), you may not be able to apply payments toward the principal until you have paid off the accrued interest.
4. Focus on high-interest loans.
Consider making extra payments to loans that carry a particularly high interest rate, while making the minimum payment on all of your other loans. If you use this strategy, prioritize your loans by ranking them from those with the highest interest rate to the lowest. Making additional payments toward loans at the top of the list may help you to pay off your whole debt faster by saving you money on interest.
5. Enroll in automatic payments.
Automatic payments can help you pay off your loans more quickly because there’s no risk of missing a payment. In addition, some loan providers may offer an interest rate deduction for enabling automatic payments, saving you money over time. Finally, by having your payments deducted directly from your bank account, you won’t give yourself the option of spending your paycheck before you pay your loans.
What if you cannot make your payments?
A lower monthly payment will not help you pay your loans faster, but it could save you from defaulting on your loans.
“A default is really, really bad news,” Jarvis says, “You always have better options before default than you do after.”
Alternative payment options for federal loans include deferment, forbearance, and income-based repayment plans. If you don’t have enough income to meet your loan payment, you can apply for a plan based on your most recent tax return. Be aware that based on today’s tax laws, if you are considering an income-based repayment plan you could face some tax consequences in 20 to 25 years, when your remaining balance is forgive.
(You are generally exempt from paying taxes on forgiven loans if you were in a program where loan forgiveness was contingent upon you working in a specific profession for a certain number of years.)You may want to consider meeting with a tax professional first so that you understand the risks.
If you have missed any payments, be sure to communicate with your lenders and find out how to get help.
Camille Puschautz is a researcher, writer, and Web producer at Think Glink Media, with a background in print and digital media. Previously, Camille worked for Bloomberg News in New York and MediaTec Publishing in Chicago. She is a graduate of the University of Dallas and Northwestern University, where she received a master’s degree in journalism.
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