Getting through college was fun, grueling, and, most of all, expensive. It was a challenge, but you finished it, and you’ve taken the first steps toward starting your career. But your six-month grace period is almost over. Now, it’s time to pay off any student loans you may have taken to cover your education. However, without a strategy for becoming debt-free, you could be paying them off for a long time.
Why do you want to pay your loans off sooner? These loans come with student loan interest; the longer you take to pay them off, the more you could end up paying. It benefits you to pay off your student loans as fast as you can. If you’re looking to free yourself from student loan debt and you meet certain criteria (such as a high credit score and steady income), refinancing might be an option for you.
In this guide, we’ll go over how refinancing can help you get through student loan payments faster and stop you from spending extra money. We’ll also touch on a few other ways you can shorten the length of your loan payments and the differences between refinancing and consolidation.
How Can I Pay Off My Student Loans Faster?
Nearly a fourth of former college students have student loan debt. Fortunately, there are several ways to pay off student loans faster. Just make sure that whatever you choose, you can do so comfortably and without sacrificing other areas of your life. Missing payments on bills like rent and going into further debt will make paying off your student loans pointless.
Here are a few ways you might try to shorten the length of your payment time:
- Pay off more than the minimum. Paying more than the required minimum payments is the quickest and most effective way to pay off your student loans. However, you’ll need to contact your servicer to make sure that your extra payment goes to the principal balance and not toward the interest. Making extra interest payments won’t do you any good.
- Enroll in autopay. Most loan servicers offer discounts when you enroll in autopay. While it isn’t necessarily huge — you can expect about a 0.25% discount — it can add up over time. Automatic payments also decrease the likelihood that you’ll forget to make payments.
- Find ways to generate more income. Start your own side hustle. If you have any profitable skills, you can use them to help you pay off your student loans faster. Teach music lessons, babysit, or copy edit as a freelancer. You can drive for a company like Lyft or deliver for one like Postmates. If you get a tax refund, you can even use that to pay off your student loans faster.
- Make extra payments. Increase the frequency of your payments. One way to do this is to pay half your monthly payment every two weeks. Because there’s a little more than four weeks in most months, you’ll end up paying the equivalent of an extra monthly payment over the year.
- Apply for student loan forgiveness programs. There are several loan forgiveness programs out there. However, most have strict requirements for qualifying. Many of these programs offer forgiveness to people with low income relative to their debt or who have public service jobs.
- Consider refinancing. A refinanced student loan could come with a lower interest rate, reducing the amount you pay over the life of the loan. However, there are certain criteria you have to meet to refinance.
How Does Student Loan Refinancing Work?
Refinancing means replacing existing student loans with a single student loan from a private lender. You can refinance private and federal student loans, but there can be consequences to refinancing federal student loans. We’ll address these in the next few sections.
Lenders issue the highest interest rates to borrowers with the highest risk. The chances are that you hadn’t started using credit cards or even thought much about personal finance when you first secured your college loans. Your credit score probably wasn’t great (if you had any credit at all), and you probably didn’t have a full-time job.
If your circumstances left you stuck with high interest rates, refinancing can help you change that. Now that your financial situation has changed, you could be eligible for a lower interest rate from a new lender that sees you as a safer bet.
Private Student Loan Refinancing
Refinancing happens when a private lender pays off your existing student loans and then issues you a new one. The new loan will either require you to make lower monthly payments over a longer repayment period or it will have a lower interest rate than your previous student loans.
A longer repayment period can be good for borrowers who can’t afford their current monthly payments, but it won’t help you if you’re looking to pay off your loans faster. If that’s the case, your aim is to get an interest rate discount. However, there are a few things you’ll need to secure one.
You’ll need a credit score that’s at least in the high 600s (preferably in the high 700s) and proof of a steady paycheck (or a co-signer with both). Your credit history shows lenders how likely you are to pay them back, and steady income shows them that you can. The higher your credit score and income, the better chance you have at getting a lower interest rate.
Let’s say you have $10,000 in a private student loan with a 10% interest rate that you secured before starting school. Now that you’ve graduated, you’ve found a steady job and have had time to build up your credit score to 690. Your new lender tells you that you are now qualified to refinance your loan with a 5% interest rate. You’ll save $500 this year. You can put your savings toward your principal loan amount to shorten your repayment term. You can imagine how much you’ll save if the life of your loan is 10 years.
Below are a few companies that can help you refinance your student loans. Be sure to research each company to see which works best for your situation. You may need to compare several refinancing lenders before you find one that gives you the best rate.
Federal Student Loan Consolidation
When you’re trying to get money for college, the first thing you should do is fill out your Free Application for Federal Student Aid (FAFSA). Federal student loans usually have lower interest rates than private ones. The government also has some solid programs to protect its borrowers if they can’t make payments. In some situations, federal student loans can even be forgiven altogether.
While you can refinance loans from the federal government with your private student loans, doing so can be risky. Refinancing makes federal student loans ineligible for benefits like income-driven repayment plans and loan forgiveness and other other flexible repayment features. A Direct Consolidation Loan combines multiple federal student loans into one loan and simplifies your payment process.
Applying for loan consolidation with the Federal Student Aid office will condense your federal student loans into one easy-to-remember payment each month, but it likely won’t help you pay them off faster or give you a better interest rate. In fact, the interest rate will likely increase a bit and if you extend the length of repayment the total total amount of interest you end up paying will increase. Only federal student loans are eligible for Federal Student Loan Consolidation. .
The interest rate for your consolidated federal student loan will be a weighted average of the interest rates of all your original federal student loans, rounded up to the nearest .125%. This can get complicated, but here’s a simple example. You have two federal student loans for $5,000 each. One has a 10% interest rate and the other has a 5% interest rate. Your consolidated student loan of $10,000 will have a 7.5% interest rate.
Benefits of Student Loan Refinancing
The biggest benefit of loan refinancing is that it can save you money. Over time, a lower interest rate can make a big difference in your total repayment. If you’re trying to pay off your loans quickly, you can use your savings to cover the principal.
There are a few other advantages to refinancing, as well. Below is a list of some ways refinancing your student loans could help you out.
- You only have to make one payment. It’s a lot easier to forget to make a payment if you’re juggling several different loans. Failing to make even one can have a harsh effect on your credit score. Refinancing combines your loans into one so you don’t have to worry about remembering to make multiple payments.
- You can change any variable interest rates you have into fixed interest rates. Variable interest rates are based on the market and can skyrocket to as high as 25% in some cases. Fixed interest rates are much more reliable for long-term student loans.
- You can take co-signers off your loan. If you took out private loans for an undergraduate degree, you likely didn’t have a good credit score or solid income and were forced to have a co-signer. Refinancing gives you a chance to thank any relatives or friends that co-signed for you by freeing them of the financial responsibility of your loan.
- Some lenders offer protections. Some private refinancing lenders will let you temporarily stop making payments on your loan if you lose your job or have an economic setback. These can put your mind at ease if you find yourself in a tough situation.
How to Improve Your Credit Score to Get the Best Refinance Rate
What if you’re gainfully employed but your credit score isn’t high enough to get a good interest rate on refinancing? There are several things you can do to raise your credit score relatively quickly (typically in six months or less). First, you’ll need to know your credit score.
Here are a few sites that will let you check yours for free. Checking your own credit score is considered a “soft pull” and doesn’t lower it.
Now that you know what your score is, here are a few strategies to raise it:
- Pay all your bills on time. Late payments will hurt your credit score more than anything else. Have a plan to pay rent, car loans, utilities, and any other bills you have, on time, every month.
- Diversify your credit portfolio. Having many different types of loans and using several credit cards (responsibly) increases your credit score. If you’re making timely payments on your home, your car, your school loans, and several credit cards, you’ll have a much higher score than someone who’s only making payments on their school loans.
- Limit the new accounts you open. This may seem counterintuitive to the last tip. While it’s true that having a balanced credit portfolio increases your score, each time you apply for a new line of credit, a lender does a “hard inquiry” into your credit history. This lowers your credit score temporarily.
- Use your credit cards less. Using less of your credit limit raises your credit score. You never want to use over 30% of your limit. For instance, if you have a credit card with a $1,000 monthly limit, you don’t want to use over $300 of it.
- Get approved to use a friend or family member’s credit card. If you get approved as an authorized user on someone else’s existing credit card (and you both use the card responsibly), it can raise your credit score.
Explore Student Loan Debt Refinancing Options Today
Paying off student loans can be tricky. If you’re not careful, you could end up staying in debt a lot longer and paying a lot more than you have to. If you meet certain criteria, though, refinancing your student loans can save you thousands of dollars over time and make you debt-free a lot sooner.
However, refinancing isn’t for all college graduates. If you have a public service job, work for a nonprofit, or have low income, refinancing federal student loans could affect your eligibility to use programs like income-driven repayment plans and Public Service Loan Forgiveness (PSLF). It’s important to research all your options when developing a strategy to pay off your student loans.
Learning the best ways to pay off your student loans doesn’t have to be difficult. CollegeFinance.com is there for you whether you’re a current or future borrower. We’ll help you get acquainted with loan terms and show what your options are. Paying off student loans can seem like an uphill battle, but you can rely on our knowledge to help you along the way.