Want to get rid of your student loans as fast as possible? You should make more than the minimum payment required -- and in fact, you should try and pay extra on top of your standard monthly payment.
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Why? Paying extra allows you to knock out your loans ahead of schedule. And the faster you repay your debt, the less you'll pay in interest over the life of those loans. It's a smart strategy, but be careful: it can backfire.
Don't let all your effort to pay extra on your student loans go to waste. There are three big mistakes you need to avoid in order to make the most of your money and repay your debt quickly and effectively.
Mistake 1: Paying Down Interest, Not Principle
The idea of paying extra on your student loans is a smart one, for the reasons outlined above. But you can't just write a bigger check or send over a bigger online payment and make the progress you want.
If you just send a larger payment or an extra payment each month, your loan servicer will apply the extra to your next scheduled payment instead of applying the extra toward the principal on your loan. This will push out your due date further and further, and even though you pay extra you won't see your balance decrease much.
That's because lenders are required to pay interest first. By applying your funds to your next payment, they can apply it to the interest and not the principle -- but paying down your principal is how you pay off loans fastest.
Tuition.io suggests making your regular monthly payment. Then, if you want to pay extra, call the loan servicer and explain that you'd like the extra applied to your current payment -- not any future payments. You can also send in a check with a letter, like this one supplied by the Consumer Financial Protection Bureau.
Mistake 2: Refinancing -- and Extending Your Loan Term
Refinancing your loans can sound like a great way to save more money (and get organized). You get to generate a new loan to pay off your existing ones. This loan could come with a better interest rate, saving you from paying more on your debt. And it allows you to focus on a single loan, rather than trying to manage multiple.
But refinancing isn't a great option for everyone by default. You need to refinance to a much lower rate to make the move worth it -- and to offset any fees associated with the refinance.
And the bigger issue if you want to pay extra on your student loans to get rid of them faster? Refinancing means getting a whole new loan term. If the term is longer, that doesn't help you knock out your debt sooner!
Be careful before you refinance any loans. Do the math and make sure all the changes you'll make to your debt by going through this process makes financial sense and aligns with your original goal to repaying your debt as quickly and cheaply as possible.
Mistake 3: Paying Down the Wrong Loan
If you want to pay off your student loans faster in order to save money on the debt, make sure you repay them in the right order. The popular "debt snowball" method for repaying money you owe instructs borrowers to repay loans by smallest balance first.
This can leave you feeling like you're making more progress, since working on the loan with the smallest balance will mean paying off your first loan in full faster than if you tackled a loan with a higher balance. But this isn't the most financially strategic way to knock out your debt.
Paying off the right loans means starting with the highest-interest rate loan first. The higher the rate, the more money you pay over time. By repaying debt in order of interest rate and working from high to low, you'll pay the least amount of money possible.