How to Pay Down Student Debt Faster
Holly Wanegar, CFP®
Associate Vice President & Wealth Advisor
Paying off student loans can feel like an insurmountable challenge, with outstanding student debt in the U.S. totaling over $1.48 trillion.1 However, with some smart strategies, you can pay down your student debt faster and more efficiently. Here are some tips to help tackle your student loans:
1. Don't Throw All Your Cash at Your Debt
While it's tempting to put every spare penny towards your student loans, it's important to maintain an emergency fund with 3-6 months' worth of living expenses. This prevents you from having to take on more expensive forms of debt like credit cards if unexpected costs arise. It's also wise to keep some cash on hand for other goals like buying a home or getting married.
2. Consider Income-Driven Repayment Plans
Income-driven repayment plans like Pay As You Earn can be helpful early in your career when cash flow is tight. These plans cap your monthly federal student loan payments at around 10% of your discretionary income. The interest that accrues is also capped while you're enrolled. You can always make additional payments when you're able.
3. Use Caution When Refinancing
You'll likely get bombarded with offers to refinance your federal student loans with private lenders at a lower rate. While tempting, you'll lose valuable federal protections like income-driven repayment, loan forgiveness programs, and options for deferment or forbearance during hardship. Only refinance if you can secure a considerably lower rate and don't anticipate needing any of those federal benefits.
4. Avoid Lifestyle Inflation
As your income grows after graduation, resist the urge to drastically increase your spending habits and cost of living. Instead, continue living modestly and use your raises and bonuses to build savings, max out retirement accounts, and make extra student loan payments. A little forced frugality now can pay off immensely later.
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5. Make a Budget and Prioritize
Create a budget based on your fixed salary, and treat things like signing bonuses and overtime pay as unexpected windfalls that can be applied straight to your loans. Systematically pay off higher-interest student loans first, as this will save you more money long-term. Specify which loan you want any extra payments applied to.
6. Build Good Credit Habits
For many graduates, repaying student loans will be their first foray into building credit. Prioritize making full, on-time payments as missed or late payments can severely impact your credit score.2 Federal loan servicers report payment activity to the major credit bureaus. Consider getting a credit card and using it responsibly to further build your credit history.
7. Tackle High-Interest Debt First
While you don't want to neglect making minimum student loan payments, it can make sense to prioritize repaying other debts with much higher interest rates first – like credit cards or personal loans. High-interest debt accumulates interest charges rapidly, so eliminating it first is advisable before aggressively paying down relatively low-interest student loans.
Strategically paying down student debt while building an emergency fund, maintaining good credit, and avoiding costlier forms of debt can put you on the fast track to becoming student loan debt-free. Consistently putting any windfalls towards your principal balance will also accelerate your repayment timeline.
At WHZ, our strategic “Plan Well. Invest Well. Live Well.™” financial planning process looks at your full financial life - from managing debt, reducing taxes, and investing for retirement - to help you achieve your goals and Live Well. Wondering if you're on track to paying down student debt? Call (860) 928-2341 or book a complementary consultation on our website.
Authored by Associate Vice President, Wealth Advisor Holly C. Wanegar, CFP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.
- https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/hhdc_2019q2.pdf
- https://wallethub.com/edu/cc/credit-card-statistics-for-college-students/25535
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