According to an article published by The Wall Street Journal, 2016 graduates have set the newest record for graduating with the most student loan debt — an average of $37,172. With America’s accumulated student debt exceeding $1.2 trillion, and at least two-thirds of American graduates leaving their respective universities with some kind of debt. The article however, still remains positive, stating that new graduates should see a greater return on their educational investment, thanks to the potential to earn a higher income over their lifetime.
Even with this news, it is hardly a surprise that those owing tens of thousands of dollars (or more) are looking for various ways to pay it back faster and save a little money in the process. While a variety of helpful strategies do exist, it may be best to avoid certain repayment strategies, including the following:
Only Paying the Minimum Payment
Paying a loan’s minimum monthly payment is necessary to pay bills on time and to protect a borrower’s credit score. However, only paying the minimum payment and nothing more will be more costly in the long run because it allows more interest to accrue. Paying more than the minimum payment, even if just by a modest amount each month, is one of the easiest ways to reduce any form of debt — whether it is student loan or credit card related — and foster long-term savings. Pay attention to the interest rates of all student loan debts and see which is more effective to pay off first. For the greatest money-saving potential, try to pay down student loans with higher interest rates first. A helpful way to do so is by paying more than the minimum payment or through strategies such as refinancing.
Making Life-Long Payments
“Life-long” payments happen when a loan’s life (loan term) is extended to keep the monthly payment as low as possible. When borrowers first start chipping away at what is owed on a loan, the need to keep monthly payments as low as possible — by extending the life of the loan — is understandable. However, extending the loan’s term can be a costly option. For instance, doubling the repayment term from 10 to 20 years may significantly increase the interest that a borrower will pay back over the life of a loan. Instead of creating a “life-long” repayment plan, borrowers should instead consider refinancing their loan(s) in order to potentially qualify for a better interest rate. However, if extending the term creates a payment necessary to maintain a comfortable budget in the near term, borrowers can often offset some of the additional long-term cost by voluntarily making higher payments as their income increases.
Tapping Into Retirement Accounts to Pay Off Student Loans
Many people have a tendency to avoid thinking about their financial future, especially when other payments are due in their present. However, it is important to avoid withdrawing money invested in retirement plans to pay off student loans. Tapping into 401(k)s or other retirement plans to pay off student (or other) loans depletes money that may be needed later in life, and it also could result in reduced earnings potential of their savings or retirement accounts. Instead of borrowing from or delaying contributions to retirement accounts to pay student loans, consider how refinancing student loans may create a more manageable, money-saving payment plan.
Delaying or Missing Payments and Impacting Credit Score Ratings
Delaying or missing payments on any type of debt — student loans, credit cards, or other financial commitments — is not a good financial decision and could impact your credit scores and future ability to borrow money. Good credit scores are important for receiving better rates on future loans. To remain in good standing with current or future creditors, borrowers should pay at least their minimum monthly payments. You may also want to pay more than the monthly minimum payment to increase the potential to improve your credit standing. Then when the time comes to refinance student loans or apply for a loan on a major purchase, borrowers may be more likely to receive a better offer with better terms and interest rates.
Benefit from On-Time Payments of Loans
Financial responsibility starts with paying your student loans on time each month. Making on-time payments are important to your overall credit score and can be beneficial when you refinance your student loans, as it may lead to better interest rates and terms. When student loans are refinanced with Education Loan Finance, borrowers are able to make payments greater than the minimum (without penalty), thereby increasing the likelihood of paying off their student loans more quickly and at a lower cost. For the greatest money-saving potential, always be diligent and disciplined with the repayment of student loans.