A few years ago a co-worker of mine suddenly proclaimed, “Well that can’t be right!”
Naturally assuming she meant something to do with work, a few of us turned around and inquired what she was talking about. “I just did the math and I think that my husband and I have paid $50,000 in interest alone on our student loans,” she bemoaned.
She hadn’t done the math wrong. She and her husband had in fact already paid $50,000 to their lenders in interest alone and they weren’t done.
Needless to say, interest rates are one of the silent killers when it comes to debt repayment.
So what’s a recent graduate to do?
There are three great hacks to pay down student loan debt faster and with less interest.
Hack #1: Bi-weekly Payments
Instead of doing one monthly payment, consider splitting your money in half. Making two monthly payments can help chip away at interest.
How does it work?
Let’s say you have $45,000 in student loan debt at a 5.5% interest rate. You’re paying $500 a month on your loans. At this rate, it will take you just under 10 years (117 months) and cost $13,206.79 in interest.
Now, instead of making one payment a month of $500, you make two payments of $250. It’s still the same amount per month, but you’re just splitting it up.
The magic comes in because there 52 weeks in the year, so you’ll be making 26 bi-weekly payments, which then translates into 13 full payments a year instead of 12.
If you get paid bi-weekly at work, you may remember that two months a year you get 3 checks instead of two. So don’t worry, this payment method won’t leave you scrambling for more cash.
So how much could the bi-weekly method save you?
Using the aforementioned scenario, you’d pay $11,603.69 in interest and be paid off in a little less than 9 years (105 months).
That’s a year of your life and $1,603.10 in your pocket just by making bi-monthly payments and squeezing in one extra full payment per year.
Hack #2: Interest-Only Payments in Grace Period
Most recent graduates ignore student loans for as long as possible (usually six months after getting a diploma). But your lenders aren’t ignoring you.
In fact, many loans are accumulating interest during that grace period. This interest then capitalizes (gets added to the principal) when you start making payments.
Instead of totally ignoring your student loans for six months, you can make interest-only payments to keep the interest from capitalizing on your principal and thus driving up your minimum due.
You may be thinking, “Who cares if I pay it now or then?” Well, the higher your principal balance, the more interest you’ll be paying overtime.
Right now you have a $10,000 loan at 5.0% interest rate. You plan to pay $200 per month after your grace period. During your grace period, you accumulated $250 in interest, so now as you starting making payments, it’s on $10,250 worth of loans. At your $200 per month strategy, you’ll pay back $11,557.95 in 58 months.
But what if you’d made interest-only payments?
Instead of letting the interest accrue, you made a monthly payment of $41.67 on your loans during the grace period. Once repayment kicked in, you dutifully made the $200 payment.
It took you 57 months to pay off the debt and cost you $11,240.71 + the $250.02 interest payment = $11,490.73.
You saved yourself $67.22 by making an interest only payment.
That may not seem significant, but imagine if you’re dealing with $60,000 worth of debt instead of $10,000. That amount saved grows quickly.
Federal subsidized Stafford Loans and Perkins loans often don’t accrue interest in a grace period, so any payments you make during your grace period go 100% to the principal.
It’s a great move to make payments and chip away at the principal while it’s at a 0% interest rate.
Hack #3: Specify Where Extra Money Goes
The last hack is incredibly simple and involves no math, just the need to communicate with your loan servicer.
There may come a time in your student loan repayment when you pay more than your minimum. Perhaps you owe $290 a month, but you round up and pay $300 a month every payment.
Or maybe you got a year-end bonus at work and want to dump $1,500 towards your student loans.
When you make a payment larger than your minimum, you need to tell your lender that this money is not intended to go towards future payments.
Lenders pull a sneaky move to keep you from chipping away at your principal by putting extra money towards future payments and therefore interest instead of the main debt.
Be sure your extra money is going towards the principal debt so you can shave time and interest off your repayment.