Saturday, 27 June 2020

Best Strategy For Paying off Federal Student Loans

For Paying off Federal Student Loans

If you have federal student loans and you want to pay them off as quickly and efficiently as possible. I have a treat for you today. In this article, I am showing you a four-step strategy for optimizing your student loan repayment and sharing what no one has told you about how to pay off your student loans fast. The path that I am showing you today has nothing to do with consolidation or refinancing. I have currently over $8,000 worth of federal student loans. And right now, I am in rapid debt pay down mode, and my current focus is paying down my car loan which I plan to have paid off by the end of the year. And after that, it will be go-time for my student loans. So I asked myself, what is the best way to maximize my student loan payments? And this is the four-step method that I have devised.

1. Set Up Auto Debit With Your Student Loan Servicer

Setting up auto-debit from your bank account not only ensures that you never miss a payment, and that prevents your account from becoming delinquent and screwing with your credit. It also reduces the interest rate on your student loans by 25 basis points or a quarter of a percent. So if one of your student loans carries an interest rate of 6% for example, by setting up auto-debit you reduce your interest rate to 5.75%, which can save you hundreds of dollars over the life of your repayment.

2. Determine The Best Repayment Method

I am sure that most of you might now have heard of the debt avalanche method as being the best way to pay off debt. If you are unfamiliar with what the debt avalanche is, it is the method of paying off your debt in order of highest interest rate to lowest interest rate, regardless of the size of the debt. In the vast majority of cases, it is the fastest way to pay down debt and results in the least amount of interest paid over the life of your loans. read this article How To Get Out Of Debt Fast - Debt Snowball vs Debt Avalanche

3.  Choose The Right Federal Repayment Plan

With federal student loans, many of us tend to forget that just because you have one monthly payment does not mean that you only have one loan. In fact, most of us will have eight separate student loans carrying four different interest rates just from undergrad alone. The key to remember is that your one monthly student loan payment is just the individual payments for each of the individual loans added together. So when you make your payment, your student loan servicer splits that amount between all of your loans. So in an ideal world, if you are using the debt avalanche methods to pay off your debt, you would only want to make payments toward the loan that has the highest interest rate which is the loan that you want to pay off first. But since you can not do that, the key is to get your student loan payments as low as possible, that way, the minimum amount you have to pay on each individual loan is minimized. And you can use any additional funds that you have budgeted to put towards paying off debt only toward the principal of that specific loan that wants to pay off first. 

It is really important when making that additional payment above and beyond the minimum, that you specify that you want that additional payment to go toward the principal balance of that particular loan. 
  • How do you get your payment to be as low as possible? A good place to start would be the good old federal student loan repayment calculator. I linked my federal student loans and then looked for the repayment plan that resulted in the lowest initial monthly payment. I personally did not choose any of the repayment plans that are income-based, because I did not want to be in a situation where my repayment was fluctuating wildly from year to year based on income changes, and being an upwardly mobile college grad, I knew that most likely my income would just keep increasing so I did not want my minimum payments to be increasing along with it.

Here is the thing, many people recommend the standard 10-year repayment plan as the best plan for paying off your debt quickly. However, the issue is that this plan also results in the highest minimum monthly payments, and that defeats the purpose of what we are trying to do here. For me, I choose the extended graduated repayment plan. On the extended graduated plan, my loans are amortized over 25 years. Payments on this plan start off low and are designed to only cover interest in the first few years of the plan, and then it gradually very slowly increases over time so that you are able to hit some of the principal as time goes on. Under this plan, I am making the smallest amount of monthly payments possible while keeping my loans from growing and being able to focus on paying off the debt that I want to, which is my car loan. Do I intend on having my student loans around for 25 years? absolutely not. However, this plant gives me the most flexibility and control around paying off my debt.

Another perk of choosing this plan is that because my payments are so low it gives me a little bit of a buffer in case I fall on hard times for example, so they do not have to turn to things like forbearance and deferment or potentially missed payments which could have a catastrophic effect on my credit score. 

4. Pay As Early As Possible 

Make payments as soon as you have the cash. Student loan interest compounds on a daily basis so the sooner you are able to make payments the more you will save in interest. If your payment is not due until the 8th of the month but you have the money on the first, go ahead and make that payment and save yourself some money. 

Quick note

On consolidation and refinancing and why neither of those strategies was right for me. When you consolidate your federal loans all you are doing is combining all of your loans into one massive loan. And the interest rate on that loan is the weighted average of all of your existing interest rates, to begin with, so you are not saving anything. And you are removing the possibility of picking and choosing which loans you want to pay additional money to.

That is it. my strategy on paying off your student loan.

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