How to pay off student loans faster—and save

Making extra payments and refinancing loans could help you pay off student debt faster.

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Key takeaways

✔  Making extra payments can help you quickly reduce student loan balances.

✔  Refinancing your student loans may help you get a lower interest rate, which can lower monthly payments.

✔  To really boost your debt payoff, refinancing to a shorter loan term could have you out of debt in just a few years.

Paying down student loans can be a grind—with seemingly no end in sight. If you’re determined to pay off these loans quickly, consider these strategies, and hopefully save some money at the same time.

See if there is a better way to pay off your student loans using the Fidelity Student Debt Tool.

Before you start making extra payments

Using extra money to pay down low-interest-rate debt like student loans may not always be the best choice for everyone. There may be an opportunity cost associated with paying down low-interest debt quickly—for instance, instead of using extra money to pay down debt, you could potentially invest it. Depending on the rate of return, your risk tolerance, and the number of years invested—and the interest rate on your debt—investing could be a better outlay than paying off debt. Of course, it’s a personal choice as to which makes sense to you.

One more caveat: If you have other types of debt with higher interest rates than your student loans, it may be better to direct any extra payments you were planning for your student loans to your higher-interest debt instead.

Get Fidelity’s point of view on the best way to prioritize saving with debt repayment.

Pay it back fast: Make extra payments

The most straightforward way to pay off your student loans faster is by making extra payments each month.

While your regular monthly payments go toward interest and your loan balance, extra payments are credited entirely against your outstanding balance. For example, if your regular payment is $100, $70 may pay interest costs while $30 is credited against your balance. Making an extra payment of $100 would decrease your balance by the full $100. There’s one consideration, though: Talk to your lender to make sure that extra payments are applied the way you would like—they may not automatically be applied to the balance and instead be credited as prepayment of the next month unless otherwise noted.

Two strategies for extra payments

Both of these strategies gather momentum as loans are paid off.

Snowball: Pay off the lowest balance first
Making extra payments on the smallest loan and paying it off can give you a psychological boost early on. Then apply the payment amount of that loan to the loan with the next-lowest balance. With an even higher extra payment, you begin to pay that one off quickly as well.

“While the snowball strategy may not be the most financially efficient, the emotional return of paying off smaller loans can give you the motivation and commitment to continue proactively paying down your debt,” says Mike Rusinak of Fidelity’s Financial Solutions research team.

Avalanche: Pay by highest interest rate
The avalanche approach is the most financially efficient because the extra payment goes to the loan with the highest interest rate. For instance, $2,000 paid against a 6% loan saves an average $5.00 in interest per month until the loan is paid off; whereas the same $2,000 paid against a 3% loan saves only $2.50 per month—assuming a 10-year loan term.

Once you’ve paid the highest rate loan off, direct the money that would have gone to that loan to the loan with the next-highest interest rate.

The impact of extra payments may be slightly different depending on your repayment plan—if you are on any of the income-driven repayment plans, then extra payments are not as straightforward; the math is similar, but there are a lot more moving parts. See the effects of either of these strategies on the type of loan you have, using the Fidelity Student Debt Tool which has all the math and logic to accurately handle the majority of federal repayment plans.

The benefits of refinancing

Refinancing can help you by changing the interest rate on your loan or by changing the term, or payback period, of your loan.

Refinancing to a loan with a shorter term is the most obvious way of paying your loans off more quickly. Student loans are set up to be paid off after 10 years, but lenders do offer loans shorter than 10 years: If you qualify you can refinance a 10-year student loan as a 5-year loan.

Everything else being equal, the new loan will have a higher monthly payment based on the shorter payback period, but the total interest paid will be less and therefore you’ll pay less over the lifetime of the loan.

You may qualify for a lower interest rate

Maybe you don’t have the cash to make extra payments. Lowering your interest rate is another option. With the same term, your monthly payment should be lower.

Beware of refinancing into a longer-term loan just for a lower interest rate. For example, if you only have 4 years left on your loan, and get a lower interest rate for a new 10-year loan, you could end up actually paying more over time because you are stretching your payments out.

Refinancing into a loan with a lower interest rate and a shorter term would be ideal—you’d pay less interest over time and pay off the loan more quickly.

Refinancing considerations

For your federal student loans, you have 2 refinancing options: a loan from a private lender, or a federal consolidation loan. There are no federal refinancing loans offered—but there is a Federal Direct Consolidation Loan that allows you to combine multiple federal loans into one.

If you have a private student loan, you can only refinance into a loan from a private lender.

What to know before you refinance with a private lender

The benefits of a federal loan will be lost once you refinance with a private lender, including the potential ability to defer payments and the ability to switch to a more flexible, income-driven repayment plan. The ability to qualify for the Public Service Loan Forgiveness program would also be lost.

Private lenders may offer a lower interest rate than a Federal Direct Consolidation Loan. The rate depends on your credit score, among other things; every lender has its own formula. Typically, the higher your score, the better the interest rate you’ll be offered through refinancing.

Loans most likely to benefit from refinancing are Grad PLUS and Parent PLUS loans that bear relatively high interest rates, ranging from 6% to 9% depending on the year the loan was taken.

Benefits of a Federal Direct Consolidation Loan

If your federal loans have lower rates than the rate offered by a private lender, you may want to consolidate these through a government-sponsored program. The interest rate you pay on the new loan will be a weighted average of the interest rates on your existing loans.

Consolidation loans won’t help you pay off your loans faster or for less money, but they are one option that could help you repay your loans by helping you to organize your payments. Many people find it easier to manage payments to one loan rather than many.

Remember, only federal loans can be consolidated through a government-sponsored program.

Pay it off and boost savings

Taking steps to pay off your student loans quickly can be extremely helpful to your financial picture even if it’s painful over the short term. Making loan payments can be stressful and getting out of debt can be a huge relief—both emotionally and to your budget. Just remember that there may be opportunity costs in terms of investments you could have made. Evaluate all of your options and decide which makes sense for you now.

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