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The Five Best/Worst Ways to Pay off Student Loans

The Five Best/Worst Ways to Pay off Student Loans

At one time or the other, many people find out that they need a student loan to continue their education. Unknown to many people, however, the way you pay off your student loan matters. Paying your student loan the right way could help your credit score, among other benefits.  

As a result, we thought to explore the top worst and best ways to pay off student loans:

Paying only the Minimum Amount

Many people might think that there is nothing wrong with paying off just the minimum amount since that is there obligation. However, what they forgot is that the principal balance is always accruing interest. As a result, if you pay any amount higher than the monthly minimum, it can reduce the cost of your student loan.

For instance, we can assume that you have a student loan that amounted to $80,000 with an interest rate of 7% and a standard 10-year repayment term. If you try and pay an extra $200 every month, you can save roughly $6,250 in interest cost. Not only will you save money, but you also get to pay the loan a year earlier.

Recommended Step: Rather than paying the minimum amount, pay a little more. There is no prepayment penalty for a student loan.

Not Applying for Student Loan Forgiveness

How beautiful it will be if the company can forgive all your student loans. There are, however, conditions that qualify you for student loan forgiveness. One of these is to enroll in a student loan forgiveness program like Teacher Loan Forgiveness or Public Service Loan Forgiveness. The second method is to participate in an income-driven repayment plan.

Recommended Step: the requirement of a student loan forgiveness program could be tricky. Hence, if you are considering it, be sure to understand the requirements. This will prevent you from getting stuck. 

Not making an Extra Student Loan Payment

It could sound unreasonable to pay more than you have to. However, if you make an extra payment, it could help you pay off your debt faster. There is a simple trick to it. The trick is not to restrict yourself to the twelve months payment per year. You could make an extra payment every three months; hence you will make a total of 16 payments in a year. 

Recommended Step: It is a good idea to make a formal arrangement in applying extra payment to your principal balance. This will allow you to limit the amount of interest that accrues.

Not making a Lump-sum student loan payment 

You might be confused about whether to use your bonus to pay off student loans or not. Bear in mind, however, that any amount can serve as your lump sum payment. For instance, if we assume that you have $80,000 in student loans at an interest of 7% and a ten year repayment period. 

Making a one time, lump-sum payment of $6,000 could help you save as much as $5,120 on your student loan. In addition, you can pay off your student loan in 10 months.

Recommended Step: Every dollar counts in paying off your student loan. Hence, when you get a tax refund, a bonus from or pay raise, make a lump sum payment to your student loan.  

Not refinancing Student Loans 

One of the best strategies to reduce your student loan rate is student loan refinancing. Refinancing your student loan will not only lower the interest rate on your federal student loans, but private student loans also get reduced.

One reason why this is a recommended alternative is that the student loan refinancing rate is very cheap. It starts at 1.99%, which is way lower than the private loan interest rate and federal student loan rate. Bear in mind, however, that there are eligibility requirements and underwriting criteria that pertain to each lender. It might include your minimum income, credit profile, monthly free cash flow, debt to income ratio, etc.  

We recommend applying to multiple lenders and using a co-signer. This will improve your chance of getting approval for the refinancing your student loan.

Recommended Steps: there are ways you can check the most recent interest rate online. You can check it and apply to refinance your student loans in about 12 minute’s average. 

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