Three Ways to Pay Off Student Debt Without Spending Extra Cash
Student Loan Debt in the United States:
Graduating from college is a great achievement. However, far too many graduates leave the school system and enter into the workforce with the burden of outstanding student debt hanging over their heads. Statistics released by the Federal Reserve indicates that a whopping $1.44 trillion is owed in outstanding US student loan debt spread across around 44.2 million Americans.
It’s estimated that around 68% of college graduates had outstanding student loans. In fact, the average student loan debt among Class of 2017 graduates is $37,172, an increase of 6 percent from the previous year.
Based on those figures, graduates could be paying around $350 a month in debt repayments over the next 10 years. The vast majority of tips circulating about repaying student debt quickly focus only on making extra repayments to cut down outstanding balances faster. However, if you’re already on a tight budget, it’s not always possible to make additional payments.
Fortunately, there are some easy ways you can speed up your student loan debt repayment plans without spending too much of your hard earned extra cash to see results. The key is to understand how to use the bank’s products and policies to your advantage.
Student Loan Debt: Change Payment Frequency
The key to speeding up your debt repayment plans is to take a bit of time to understand how banks, financial institutions and other lenders charge interest on the money you owe.
If you’re able to reduce the amount of interest your lender is able to charge you, then each repayment you make should have more money applied to repaying your debt balance instead of paying interest charges. If you look at your loan statement, you’ll see that an interest charge is applied to the account once a month.
What you may not realize is that your lender charges interest on your outstanding debt balance at the end of each day. At the end of the month, the lender adds up those daily interest charges and shows them as a total sum, which is shown clearly on your statement.
Once you understand how your interest is calculated, you have an opportunity to use the lender’s policy to your own advantage. The numbers used in the example below are based on the national average debt amount of $37,172 at an interest rate of 5.4% over a 12-year loan term.
In the first example, you’ve made two monthly payments. A portion of each payment goes towards paying your interest charges and the remaining amount is paid off your outstanding balance. If you’re like most people, you’ll make your debt repayments once a month, just like the lender expects.
However, by changing your payment frequency you’re in a position to reduce the amount of interest the lender is able to charge on your loan. Making smaller payments more often means that you’re reducing your balance in little increments on a regular basis. The result is that you should pay exactly the same amount of money on repayments, but your debt amount will reduce faster overall.
For the purpose of this example, the regular monthly repayment of $351.31 is divided by 4. The repayment is now $87.83 per week.
Over the course of two months, you should have made 8 weekly repayments and spent the same amount of money. In this case, you’ve spent just three cents extra over a period of 8 weeks, simply because dividing the original monthly figure by 4 meant rounding the resulting amount up a fraction of a cent.
However, you can see that you’ve paid $26.34 less interest, which has gone towards paying off your debt that little bit faster. You’ve simply used your knowledge of how lenders charge interest on your debts to your advantage.
Student Loan Debt Repayment: Extra Weeks in the Year
In the previous example, you’ve done nothing more than change how frequently you make your repayments. Instead of making one payment per month, you’re making four smaller payments on the same day each week that add up to the same amount of money as your monthly payment.
If you take the example over just two months, there are 8 weekly payments being made. Yet if you look at any calendar, you’ll notice that some months of the year have an extra week squeezed into them.
For example, if you were to start making your new weekly repayments every Friday, you’ll notice there are four months in each year where there are three Fridays instead of just two.
Over the course of a year, those four weekly repayments add up to one whole monthly payment. While you might not be paying any extra money for the majority of the year, at the end of 12 months you’re an entire payment in advance.
In the previous example the calculations extend for just 8 weeks. Let’s take the calculations a little further to see how your debt balances are affected after two years using the same principle.
The combination of making your repayment more frequently with the addition of some extra weeks helping to reduce your balance throughout each year has the power to compound your debt reduction efforts.
If the calculations continue all the way through to the end of the loan term, you should find that changing over to weekly repayments can make it possible to repay your entire debt 16.5 months sooner and paid $1,598.43 less in interest charges.
Student Loan Debt Consolidation:
Take a close look at the statements for each of your outstanding debts. Make a note of the balance owing and the interest rate you’re being charged for each one.
Then shop around and compare consolidation loan options available from several different lenders for your individual credit situation.
Keep in mind that some direct subsidized loans may be locked into a fixed rate for the life of the loan. You might find that some of your loan amounts could benefit by refinancing student loans over to a consolidation loan with a lower interest rate, while you might be better off keeping other debts on their current fixed rate.
If you’re able to negotiate to consolidate some of your outstanding debts into a new loan with a lower interest rate, it could be possible to reduce your minimum monthly payments.
Even if you’re able to reduce your current repayment amounts by just $30 per month, you’re in a position to put those savings back towards your debt reduction plans.
After all, you’re already paying that amount each month, so you’re not spending any more money. However, by reducing the minimum monthly payment your lender expects to see and paying the amount you’ve saved each month, you’re effectively speeding up your debt repayment efforts.
For the purpose of this example, assume your minimum monthly repayments have been reduced to $321.32, down from the original $351.21 you were paying in previous examples. That’s slightly under $30 each month you’ve saved.
However, while your minimum payments have changed, the idea is to continue making the same repayments you were making before. You’ll also be taking advantage of making more frequent repayments, so the weekly repayment also remains the same at $87.83 per week.
The result could mean repaying your loan 2.25 years sooner and paying $1,854.54 less in interest charges overall.
Taking Control of Your Debt Reduction Plans
The key to taking control of your debt reduction plans is to do some simple calculations based on your own financial information. Work out exactly how much you can comfortably afford to pay off your debts each week and then set up a direct debit with your lender.
The examples used throughout this article are designed to highlight that it is possible to repay your debts faster without spending any extra cash or eating into your budget. Imagine how much quicker you could get rid of those debts if you were to pay extra as well.
Resources: Federal Reserve Consumer Credit Statistics