‘Even an extra $5 a month can make a big difference’
If you’re looking to pay off your student debt faster and save money on interest, consider making extra payments each month. According to Betsy Mayotte, president of The Institute of Student Loan Advisors, even adding just $5 to your monthly payment can have a significant impact. To ensure that the additional funds go towards reducing the principal balance, be sure to instruct your loan servicer accordingly.
Illustrating the Impact
Mark Kantrowitz, a higher education expert, provides an example to demonstrate the effect of additional payments. For someone with a $10,000 loan and a 5% interest rate, adding $50 per month would shorten the repayment timeline by almost four years and save over $1,000 in interest.
Consider Your Budget
If you’re unsure how to find the extra cash to make these additional payments, creating a budget can help. Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth, suggests scrutinizing your monthly cash flow to identify areas where you can allocate more money towards paying down your student loans.
Consider Auto-Pay and the Avalanche Method
Enrolling in automatic payments may qualify you for an interest rate discount from your student loan servicer. Additionally, claiming the student loan interest deduction on your federal income tax return can reduce your taxable income. This deduction can be worth up to $550 per year.
Prioritize Higher-Interest Loans
Before accelerating payments on your student loans, it’s essential to prioritize higher-interest debts. Paying off credit card debt with an interest rate of over 20% should take precedence over student loans with lower rates. The avalanche method involves making minimum payments on all loans while directing extra funds towards the loan with the highest interest rate.
Avoid Deferments and Forbearances
Unless you’re unable to make payments, it’s best to avoid deferments and forbearances as they prolong your repayment timeline and result in more interest accrual. To determine your interest rates and loan details, contact your loan servicer or visit Studentaid.gov.
Hot Take: Paying More Saves More
If you want to pay off your student debt faster and save money on interest, making extra payments each month is a smart strategy. Even small additional amounts can have a significant impact on reducing your overall debt and shortening your repayment timeline. By prioritizing higher-interest loans, creating a budget, and exploring options like auto-pay and tax deductions, you can accelerate your journey towards becoming debt-free.
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