How to Pay Off Student Loans as Quickly as Possible

Updated: Apr 10, 2020

Paying off your student loans as quickly as possible is likely one of your top priorities. Whether you recently graduated from college or you have been working on paying off your student loans for a while, making a plan is critical for paying off your student debt if you want to save time and money.

Following these steps will help you get on the right track to quickly paying off your student debt.

1. Get on a Budget

It is extremely surprising how many people talk, tweet, post, etc. about paying off their student debt, but yet have almost no clue how and where they're spending money. The number one way to enhance the way you manage your student debt is to start creating—and living by—a budget. The reason this is so important, specifically for paying off student loans, is that a budget will show you exactly where your money is going. I suggest going through all of your expenses and putting each transaction into categories until all of your expenses have been accounted for and aligned to a category. After that, determine how much you should allocate to each category for the next month. A best practice is to review and document your transactions as often as possible. For me, I do this almost every other day. If done right you'll be able to see exactly where all of your money is going. This will ultimately allow you to understand how much extra you can put towards your student loans.

2. Make (smart - see #3) Extra Payments

I certainly understand that this is easier said than done. But if you can discipline yourself to do #1 you'll be able to know for sure if and/or how much you can make extra payments towards your loans. If you’re only making the minimum payment each month, you won't make very much progress in terms of saving time and money.

Here’s an example:

Let’s say you have $30,000 in student loan debt with a 6% interest rate and a 10-year loan term. Based on this example, you’d be paying an estimated monthly payment of about $390. At the end of the 10-year loan period, the total amount that you would end up paying would be about $46k — FYI... that’s almost $12k over your original loan amount, due to interest. But let’s say you decided to increase your monthly payment by $75 or so... You’d now pay off your entire loan in about eight years (instead of 10 years) and pay about $9,100 in interest (over $2,500 in interest saved!) instead of paying nearly $12k in interest. Will you ask yourself a question for me? "What would I do with an extra $2,500 plus the ~$465/mo that no longer has to go to student loans."

Important note: Tell your loan servicer to keep next month’s due date the same and to just apply the extra amount of money to your current loan balance. However, if you’re having difficulty making the minimum payment each month, you might feel like paying more money is not possible.

3. Choose a repayment strategy that motivates you the most.

A lot of people with student debt aren't aware of how or when to make extra payments. The two most common strategies for paying off debt are debt avalanche (targeting loans with the highest interest rate first) and debt snowball (targeting loans with the lowest balance first). With both of these methods, the assumption is that as loans are paid off, the monthly payment gets applied to the next prioritized loan. We refer to this as the "rollover method."

  • Debt Avalanche - Target loans in order of high to low-interest rates. This method saves the most money (by reducing the amount of interest being paid over the life of the loans).

  • Debt Snowball - Target loans in order of smallest to largest balance. While less efficient in terms of time and money saved, debt snowball can help borrowers build momentum in paying off their loans by quickly paying off the smallest loan.

As far as when to make extra payments it's important to know that interest occurs daily for student debt and typically loan providers allocate extra payments in a way where occurred interest is paid first then the remaining funds get applied either to the highest interest rate loan or in accordance with how you instructed the payment to be applied. With that in mind, the optimal time to make an extra payment would be when the maximum about of that payment would go completely towards the principal balance of your loans. In short, the best time to make an extra payment is the day after your normal monthly payment gets applied when the occurred interest has been completely paid off for that period.

Download APAY - a mobile app designed to provide insights and information to monitor and manage student debt.