Student Loans: Paying Off Your Debt Faster

How long is the repayment period on your student loans? Ten years? Twenty years? Even 25 years? The appeal of taking the full period to repay your loans is that your monthly payments will be lower. When you’re first starting out or dealing with a financial hardship, a low monthly payment might be the only way you can stay current on your loans.

But if your financial situation improves and you can afford to put more than the minimum toward your loans each month, it can reduce how much you spend on interest in the long run and free up your monthly cash flow sooner.

Let’s say you graduate with $30,000 in student loan debt that has a 6% interest rate. Here’s how much that debt will cost you based on how long you take to pay it off and what your monthly payment would look like under each scenario.

Total Student Loan Interest by Repayment Period

What complicates the math is that if you’re taking 20 or 25 years to repay your loans, you’re probably doing so under one of the repayment plans that takes your income and family size into account, meaning your monthly payment might be more or less than it is in the example above and it won’t be constant over the life of the loan. The above chart is a simplified example to give you a general idea of how much more expensive your loans are in total the longer you take to repay them.

Freeing up your monthly cash flow means you can dedicate that money to other goals, such as buying a house, starting your own business, saving for retirement or socking away money for your own kids’ education so they don’t have to borrow like you did. To speed up your repayment period, one or more of the following strategies might be right for you.

Biweekly Student Loan Payments

Your student loan payments are due once a month. What if you made them every two weeks instead?

Most of us get paid on this schedule, so it can be easy to budget for biweekly student loan payments. What’s more, you’ll squeeze an extra monthly payment in over the course of the year in a relatively painless way. Just make sure your loan servicer receives both biweekly payments before the monthly due date to avoid late fees.

With biweekly payments, not only will you save on interest by having fewer total months of payments, you’ll also save money on interest because you’ll be reducing your loan principal every two weeks, allowing slightly less interest to accrue than if you only made one payment a month. On a 10-year repayment plan, switching from monthly payments to biweekly payments would get your loan paid off after 9 years and save you more than $1,000 in interest on a $30,000 loan at 6%. 

The other administrative detail you need to handle if you make biweekly payments is to make sure your loan servicer applies your payments correctly. Select the option that puts your extra payment toward your balance instead of applying it to your next bill.

What if you have multiple loans? You could make biweekly payments on each; you could consolidate or refinance into one loan so you only have to make biweekly payments on one loan (more on that in chapter 8); you could set up automatic biweekly payments so you don’t have to constantly worry about scheduling (you might get a 0.25% or 0.50% interest rate discount as a bonus); or you could just make biweekly payments on your largest or highest interest-rate loan to simplify things. (For another accelerated debt repayment method, see Debt Avalanche vs. Debt Snowball: Which Is Best for You?)

Increase Your Monthly Payment

How much can you afford to add to your loan payment each month? $5? $20? $100? It doesn’t have to be the same amount each month, either. The important thing is to commit to consistently paying something extra. Returning to our $30,000, 10-year loan example, if you paid an extra $27.75 a month on top of your usual $333 payment, you’d be squeezing in the equivalent of an extra payment over the course of the year, and your results would be comparable to using a biweekly payment schedule.

Refinancing Your Student Loans

Refinancing your student loans can also help you repay your debt faster. This is a big topic that we’ll discuss in detail in section 8.

Taking the Student Loan Tax Deduction 

Student loan interest of up to $2,500 is deductible on your federal tax return if your income doesn’t exceed certain limits. You can take this deduction even if you don’t itemize.

For tax year 2017, your modified adjusted gross income must be less than $65,000 if you’re filing as a single and less than $130,000 if you’re married filing jointly in order to claim the full student-loan interest deduction. With income between $65,000 and $80,000 and between $130,000 and $160,000, the deduction is reduced. If you earn more than that or you’re married filing separately, you can’t claim this deduction at all.

Suppose you’re in the 25% federal tax bracket and you paid $3,000 in student loan interest. Your tax savings from claiming the deduction would be 25% of $2,500, since the most you can deduct is $2,500. That means you save $625.

The deduction reduces the total amount of interest you pay, but it doesn’t eliminate it. In this example, you’re still paying $2,375 a year in interest after the tax break. Paying your student loans off faster will save you far more money than keeping them around and taking the student loan interest deduction. That’s especially true if your income is high enough that you no longer qualify for all or part of the deduction. But you should definitely take the deduction as long as you qualify for it.

When to Hit the Brakes on Accelerated Repayment 

Making extra student loan payments is not in your best interest if you are carrying higher-interest debt, such as credit card debt. If that’s the case, focus any extra payments you can afford on your higher-interest debt first.

Also, this probably goes without saying, but if you find yourself struggling financially, focus on staying current on all your payments and don’t worry about making extra payments until your situation improves. You don’t want to risk damaging your credit score because you fell behind on payments – nor do you want to risk having to borrow money at a high interest rate for some other expense because you depleted your emergency savings through your accelerated student-loan payments.

Next, let’s talk about a step you might want to take to simplify your loan payments: federal student loan consolidation.