Use These 7 Smart Habits to Pay Off Your Student Loans Early

It takes the average person 18.5 years to repay their student loans, beginning at age 26 and ending at age 45. And when student loan rates are high, you could end up paying tens of thousands of dollars in interest. If you can afford it, paying off student loans early can improve your financial situation dramatically. Here are some smart habits that will help you pay off student loans before your term ends, so you can begin to save for retirement.

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    7 habits that will help you pay off student loans early

    Start early

    Check Your Student Loan Rates

    View our top-rated lenders and find the best rates today. It’s quick and easy.

    When it comes to repaying student loan debt, one of the best things you can do is to start early. Many people wait to start repaying their loans once they’ve graduated and have a full-time income. But if you can get a part-time job in school and start to slowly chip away at your debt, you can pay off your debt much sooner.

    [ Read: How to Apply for a Student Loan ]

    For example, say you work a part-time job that pays you $300 per week. On a monthly basis, you could put $600 towards your student loan balance, and put the other $600 in an emergency fund. Over the course of one year, you would have paid $7,200 towards your loan principal.

    Make a budget

    Before you take out a student loan, it’s a good idea to create a personal budget and make sure you can afford the monthly loan payments. Look at your income sources, account for your monthly bills and expenses, then see how much money is remaining. Your monthly loan payments should not exceed the money you have leftover.

    Making a budget is important because it helps you stay on track with your spending. When you’re paying off a student loan, you might need to live frugally and save money wherever possible. If you don’t have enough money to pay your student loans each month, you’ll face consequences and possibly late fees.

    Create an emergency fund

    Even when you stick to a budget, unexpected expenses will likely come up. There are some things you can’t plan for, like vehicle repairs or medical bills. Instead of dipping into your loan payment reserve, consider setting up an emergency fund that is used exclusively for unexpected expenses.

    The act of creating an emergency fund won’t necessarily help you repay your loan faster. However, having extra savings means you don’t have to put your monthly loan payments in jeopardy. If you’re already living on a tight budget, the emergency fund can offer peace of mind.

    Make additional payments

    Another effective way to repay your student loans faster is to make additional payments when you can afford it. By doing so, you’re shortening the loan term and paying less interest over the lifetime of the loan. Even making several, small additional payments throughout the year can help you pay off your student loans faster.

    Here’s an example of how this works. Imagine you have a $40,000 student loan with a 6% interest rate and a 15-year loan term. The monthly payments would equal roughly $337. If you could make two payments each month, for a total of $674 per month, you would repay the loan in half the time.

    Enroll in AutoPay

    Most lenders offer discounts for customers who enroll in automatic payments. You may be able to get a discount of 0.25%–0.50% on your loan. The discount isn’t tremendous, but every bit helps. Putting your loan payments on autopay also means that you’ll never miss a payment.

    Say that you have a $15,000 student loan with a 5% interest rate and a 10-year loan term. Your monthly payments would be about $159. If you sign up for autopay and get a 0.50% discount, your monthly payments would drop to $155. Over the course of the 10-year loan, you would have saved over $400 in interest.

    Refinance your loan

    If you’re struggling to make your student loan payments, consider refinancing your loan to get a lower interest rate. Refinancing is an effective way to pay off student loans faster, especially if you have multiple outstanding loans. However, this approach is not right for everyone. For instance, if you have a federal student loan, you’ll lose valuable benefits, like income-based payment plans and loan forgiveness programs.

    [ Read: Student Loan Consolidation and Refinancing Guide ]

    Here’s how refinancing works. Let’s say that you have a $25,000 student loan with a 7% interest rate and a 10-year loan term. Your monthly payments would be about $290. If you refinance your loan to get a 5% interest rate and keep the monthly payments the same, you could repay the entire loan in 107 months, which is about eight years and nine months.

    Take it slow

    The last tip for repaying your student loans is the take it slow. Being in debt can be frustrating, especially if you want to save for retirement or budget for other big expenses. However, don’t be tempted to pay off your loan too quickly. If you put all your money towards the loan payments, you risk putting yourself in debt to cover other necessary bills.

    Ultimately, your life should not revolve around your student loan debt. Make a solid plan for repaying your loans early, and make sure that you can afford the payments without jeopardizing your financial situation. It’s better to take your time repaying your debt than to pay it off too quickly and end up in more debt as a result.

    Things to consider about paying off your student loans

    What are your student loans’ interest rates? 

    A student loan interest rate is essentially the cost of borrowing the money. There are two types of student loans — federal loans and private loans. Some people have both federal loans and private loans, which means they will pay multiple interest rates. Each loan would also have its own monthly payment.

    When repaying student loans early, dealing with two interest rates can add a layer of complexity. Ideally, you should repay your private loans first, because the interest rates are usually higher and the penalties for late payments could be more severe. You also have the option to refinance multiple loans into one loan, with one monthly payment and one interest rate.

    [ Read: Current Student Loan Rates ]

    How important is paying off your student loans?

    Paying off your student loans is incredibly important. If you stop paying your student loans, the loan will continue to collect interest, which increases the amount of money you owe. If a debt collector comes after you, be prepared to pay hefty fines and face additional penalties.

    Besides the fees, one of the most important reasons to pay off your student loans in full is to avoid issues with your credit score. When you’re consistently late on loan payments or default on your loan, your credit score will take a huge hit. Having poor credit makes it very hard to purchase a car, get car insurance, buy a home, take out another loan or get a credit card.

    The benefits of paying off student loans early

    There are many benefits to paying off student loans early. First, it provides financial freedom. You shorten your repayment period and pay less money in interest over time. Even though you pay more money upfront, you save money over the lifetime of your loan. The earlier you repay your loan, the sooner you can begin to save for retirement or other big purchases, like a home down payment.

    There are also emotional benefits to repaying a loan early. Once your debt is paid off, you no longer have to adhere to a strict budget. You can spend money more frugally without worrying about whether you’ll be able to pay your monthly loan balance. Paying off your student loans means dealing with less financial stress, which can weigh heavily on young people who are just starting their careers.

    Student loan FAQ

    What happens when I pay off my student loan?

    When you pay off your student loans, you no longer have monthly payments. Whether you have a private or federal loan, there are usually no prepayment penalty fees to worry about.

    Can paying off student loans build credit?

    Paying off your student loans can help your credit score, but not significantly. Typically, your credit score will increase when you take out the loan. Your credit could actually decrease slightly once the loan is paid in full, but it will even out over time as you build your credit history.

    Check Your Student Loan Rates

    View our top-rated lenders and find the best rates today. It’s quick and easy.

    Is it smart to pay off student loans early?

    Paying off student loans early is a good idea if you can afford to do it. Repaying the loan early means you’ll pay less money overall. However, don’t risk putting yourself in more debt just to pay off the loan before the term is up.

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Elizabeth Rivelli

    Contributing Writer

    Elizabeth is a contributor to The Simple Dollar, where she reviews insurance providers and policies. She has more than three years of experience writing for top online insurance and finance publications, including Bankrate, Coverage.com and Reviews.com.

    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Loans Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to Interest.com, PersonalLoans.org, and elsewhere.