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Should You Pay Off Student Loans Immediately or Over Time?

June 12, 2019

When you start your post-college career, you may be tempted to breathe a sigh of relief. Before you do that, you have important decisions to make. You’ll have to stretch your paycheck to cover your new lifestyle and associated expenses: a furnished home or apartment, vehicle, insurance, and hopefully a 401K contribution. If you are like 70% of college graduates, you also have student loans that need to be repaid.

 

In most situations, it’s going to be most beneficial to pay off your loans as quickly as possible so that you are paying less towards interest. The average college graduate’s starting salary, however often cannot allow for enough additional income to cover more than the regularly scheduled student loan payments.  Most student loans have a six-month grace period so you can do some budgeting and planning first – if you need to. We don’t suggest using the grace period unless you find it necessary to organize your finances. During a deferment such as a grace period, the interest could still be accruing depending on the type of loan that you have.

 

If you determine that you may be better off establishing sound financial footing and a workable monthly budget before you begin repaying those daunting loans. Keep these tips in mind as you formulate a strategy for debt payoff.

 

Student Loans Have Advantages

Varying types of debt are governed by different laws and regulations. Banks often base interest rates for consumer credit loans on your established credit rating. Interest rates for auto loans or credit card debt tend to be higher than a mortgage or student loan interest. As you review your debt load and make a plan, remember: student loan debt comes with a few “advantages” that other types of debt don’t offer.

 

  • Preferential tax treatment: With a new job, you will be paying taxes on your income. Student loan interest is deductible up to $2,500 and can be deducted from pre-tax income.
  • Lower interest rates & perks: Federal student loans have lower interest rates and are sometimes subsidized by the government.
  • Lender incentives: Private student loans may come with incentives from the lender that make them a better deal than other credit types. These include fee waivers, lower interest rates, and deferment options.
  • Flexible payment plans: Options for lower payments and longer terms are available for both federal and private student debt.
  • Build your credit score: You can build your credit score with student loan debt. Now, depending on whether you’re making on-time payments or not, you could negatively or positively affect your credit. If you chose to make small payments during deferments, or a grace period, and regular on-time payments you will be more likely to establish a favorable credit record and reduce the amount of interest you pay overall.

 

Programs to Help You With Student Loan Payments

There are few options for loan forgiveness with regular debt, but student loans offer opportunities to reduce or eliminate your debt. These may come with commitments and tax implications, so be sure you fully understand them if you decide to take advantage of these programs.

 

  • Loan forgiveness: Federal student loans may be forgiven, but you’ll want to be sure that you’re following all of the requirements needed of the program. Be sure before choosing this option that the federal loans you have qualify for the program. Also, keep in mind there could be taxes due on the amount that is forgiven. Some student loan forgiveness programs include PAYE (Pay as You Earn) and REPAYE (Revised Pay as You Earn), Public Service Loan Forgiveness, and Teacher Loan Forgiveness.
  • Loan Consolidation: Multiple student loans can be consolidated into one payment with the interest rate determined by a weighted average of your current loans – interest rates. Combining multiple loans may be easier to manage on a modest starting salary. Consolidating federal loans usually doesn’t require a good credit score, either.
  • Refinance, and you could achieve a lower interest rate: Lenders like Education Loan Finance specialize in student loan refinancing, and have options like variable interest rates and flexible terms. Refinancing your debt could make student loan debt easier to manage than other types of credit.

 

Pay Off High-Interest Debt First

Before you decide to pay off your student loans, think about the financial obligations you’ll be taking on. Instead of carrying a credit card balance or making low payments for an auto loan, it makes sense to continue your low student loan payments and pay off more expensive debt first or debt with a higher interest rate. In the long run, you’ll save money and build your credit score.

 

If you still have doubts about not paying off student debt first, consult a professional financial advisor for help prioritizing your goals and setting up a budget that lets you achieve them.

 

Click Here to Learn More About Student Loan Repayment

 

 

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woman asking employer for student loan assistance
2020-08-05
How to Ask Your Employer to Help Pay Student Debt

These days, employers offer all kinds of benefits to keep employees, from kombucha on tap and innovative new office spaces to ping pong tables and video game rooms. The list of benefits seems to grow all the time.   When you think about it, though, how much do you really need that kombucha on tap? Instead, what many graduates need is help with their ever-mounting student loans. In combination with other methods of dealing with student loan debt, employers can play a valuable role in ensuring their employees’ financial stability.   Employers are beginning to recognize this trend, as well. That’s why some have begun to offer help to employees with student loan debt. While an uncommon practice at the moment, some companies now offer options to help employees pay back their student loans.   The practice is rapidly becoming more popular, and if you’re lucky, your employer may already offer a student debt relief program. Here are several ways employers are already helping to reduce their employees' student loan debt.  

Financial Education

Employers have begun to understand that their own financial success is tied to the financial success of their employees. As a result, some employers have begun to offer financial education opportunities.   These opportunities come in many forms, including workshops, webinars and even counseling. While many employees already have a firm grasp on financial concepts, these programs can still be incredibly beneficial to those weighed down by student debt as they often cover lesser-known tactics and reinforce familiar strategies.  

Student Loan Repayment Signing Bonuses

Another method of helping employees with student debt is the signing bonus. For example, some companies offer $1,000 towards student loans for new hires. This $1000 can drastically reduce the amount graduates pay in interest over the life of their student loans and is an effective way for companies to hire and keep dedicated, hardworking employees.  

Employer Repayment

The most exciting benefit employers are beginning to adopt is direct assistance with student loans. Now, in addition to savvy fiscal advice, some companies are backing up their support with dollars and cents.   A few companies now offer yearly bonuses to help pay back student loans. One of the most generous of these companies is Nvidia. Employees earn $6,000 a year towards their student loans up to a $30,000 maximum. Several companies offer comparable or lower amounts. Regardless of the repayment amounts, this innovative strategy provides a new way to fight back against student debt.   A variation of this policy is occasionally used, as well. In this variation, employees who don’t take their PTO can trade their PTO days for student loan assistance. With many in the United States not taking their PTO days anyway, this is a compelling option for student loan borrowers.  

Contributions to 401(k) Plans

It may seem strange for 401(k) contributions to go hand-in-hand with paying off student debt. You might even expect to have to choose between them.   If you’re employed by Abbott Laboratories, though, you don’t have to choose. Employees who contribute at least 2% of their pay toward student loans are eligible for the full 5% employer matching in their 401(k), even if they do not otherwise contribute to their 401(k). Abbott Laboratories is the first company to offer this incentive to help employees to pay off student debt, and hopefully many companies will follow in their footsteps.   Sadly, these types of programs are not as commonly offered as they should be, but that isn’t necessarily bad news for you.   If student loan assistance programs are something that you would like to see at your company, then make an appointment to speak with either your boss or to human resources. In this day and age, the competition for the best employees is fierce, and employers are always looking for ways to keep employees happy. In some cases, it may even be cheaper than a raise.   It’s also worth mentioning your interest in such programs while negotiating your salary and benefits package for a new job. They may include it as an additional benefit.   If your employer already provides these benefits, that’s fantastic! You’re already one step closer to being unburdened by student debt. If you're curious about how to finish the job and free yourself from student debt completely, one great way to do that is Student Loan Refinancing. You can learn more here.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
calculator showing interest
2020-08-04
Student Loans: What is the Difference Between a Principal and an Interest Payment?

If you’re planning on going to college, you should be prepared for potentially high costs. The average cost of tuition and fees at a public four-year university for an in-state student is $10,440, while it’s $36,880 at a private school.    By Kat Tretina   While those numbers are pricey enough on their own, financing can add to the expense. If you borrow money to cover the total cost of attendance, you’ll end up repaying more than you initially borrowed because of interest charges — what lenders charge you in exchange for lending you money.    When dealing with student loans, it’s important to understand how student loan interest rates affect your repayment and how your extra payments are applied to your debt.   

How Student Loan Interest Rates Affect Your Loan Balance

Student loan interest rates can cause your loan balance to grow over time. The higher the rate, the more interest that accrues.    For example, if you took out $30,000 in student loans and qualified for a 10-year loan at 4% interest, you’d pay $6,448 in interest charges on top of the $30,000 you borrowed.    But if you qualified for a $30,000 loan at 5% interest — a difference of just 1% — you’d pay $8,184 in interest charges. The extra percentage point would cause you to pay over $1,700 more in interest charges.    However, you can cut down on interest payments by paying off your debt ahead of schedule. When you pay off your loans early, less interest accrues over your loan's life, allowing you to save money.   

The Difference Between Principal and Interest Payments

When you enter into repayment, your loan payments cover two different aspects: 
    • Interest: Interest that has accrued to date
    • Principal: The original loan amount
  When you make a payment, lenders typically apply the payment to any fees first, such as late fees or returned payment fees, then to interest charges. If any money is left over, they will apply the excess to the principal balance.   

Education Loan Finance Student Loan Repayment Options

If you take out private student loans from ELFI*, you can choose from the following repayment options: 
    • Immediate repayment: You make payments toward the principal and interest right after disbursement
      • Best for: You’re working while in school and can afford the payments. You want to pay the least amount of interest possible. 
    • Interest only: While you’re in school, you make payments that only cover the interest that accrues on the loan. 
      • Best for: You can’t afford to make full payments, but you want to minimize interest charges. You’re working part-time or have some income while in school. 
    • Partial payment: With partial payments, you make a flat-rate payment — typically $25 — while you’re in school. 
      • Best for: Money is tight while you’re in school, but you want to chip away at some of the interest that accrues. 
    • Fully deferred: If you opt for fully deferred repayment, you don’t make any payments at all while you’re in school. This is the most expensive repayment option, as more interest accrues over the life of the loan. 
      • Best for: You are in a rigorous academic program and need to completely focus on your studies, so you don’t want to make any payments while in school. 
  Use the private student loan calculator to see what your payment would be and how much you’d repay over the life of the loan under each repayment plan.*   

Student Loan Repayment Strategies to Pay Off Your Debt Faster

Once you graduate, there are ways to accelerate your debt repayment and reduce the amount of interest that accrues.   

1. Make Extra Payments

If you want to pay off your debt faster and are thinking about different student loan repayment strategies, consider increasing your minimum monthly payments.    More of your payment will go toward the principal each month, reducing how much you’ll pay in interest and allowing you to pay off the debt ahead of schedule.    For example, if you had $30,000 in student loans at 5% interest and a 10-year repayment term, your monthly payment would be $318 per month. If you only made the minimum payments, you’d repay a total of $38,192 by the end of your loan term.    If you increase your payments to $368 per month — an addition of just $50 per month — you’d pay off your loans 20 months early. And, you’d repay just $36,731. By adjusting your monthly payment, you’d save $1,461.   

2. Use the Debt Avalanche or Debt Snowball Methods

If you have multiple student loans, consider using either the debt avalanche or debt snowball method to tackle your debt.    With the debt avalanche method, you make extra payments toward the loan with the highest interest rate.    With the debt snowball, you target the debt with the lowest balance first.    Which is best for you? It depends on your goals and personality. Learn more in our breakdown of the debt snowball and debt avalanche method repayment strategies  

3. Refinance Your Debt

Student loan interest rates have a big impact on your overall repayment. By refinancing your student loans,* you can qualify for a lower interest rate so more of your monthly payment goes toward the principal. Over time, refinancing can help you save a significant amount of money.   

The Bottom Line

By understanding how payments work and how student loan interest rates affect your total repayment, you can pick a repayment plan that works for you.    If you still have questions, ELFI’s Personal Loan Advisors can walk you through the loan application process and answer any questions you have.*  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
young woman researching student loan refinancing requirements
2020-08-03
Income, Credit Score, and Credit History: Which is Keeping You From Refinancing?

If your goal is to become debt-free as quickly as possible, student loan refinancing can be a powerful tool for managing your loans. ELFI customers reported that they save an average of $272 per month, and should see an average of $13,940 in total savings after refinancing their loans with Education Loan Finance.1   By Kat Tretina   Unfortunately, not everyone qualifies for refinancing the first time they apply. When you submit your loan application, refinancing lenders look at your income, credit score, and credit history to determine whether to issue you a loan. If you don’t meet their requirements in just one area, the lenders will deny your application.    If you aren’t quite eligible for refinancing quite yet, here’s what you can do to improve your application so you can get approved in a few months — and qualify for a lower interest rate.  

Student Loan Refinancing Requirements

Borrower requirements can vary from lender to lender, and some lenders are very vague about their refinancing criteria. However, ELFI is different and has transparent eligibility guidelines.    To qualify for student loan refinancing with ELFI, you must meet the following
student loan refinancing* requirements:
    • You must be a U.S. citizen or permanent resident
    • You must be the age of majority or older 
    • You must have at least $15,000 in student loans to refinance
    • You must have a bachelor’s degree or higher
    • You must have a minimum income of $35,000
    • You must have a minimum credit score of 680
    • You must have a minimum credit history of 36 months
    • Your degree must come from an approved post-secondary institution and program of study
 

Tips for Improving Credit Score

ELFI’s minimum credit score for refinancing applicants is 680. If your score is less than that, you’re not alone. According to Experian, about 33% of Americans have a credit score under 670. However, that doesn’t mean you’re stuck with a poor credit score. By making some changes, you can boost your credit.    To improve your score, use these tips:   
  • Make all of your monthly payments on time: Your payment history makes up 35% of your credit score. To raise your credit, pay all of your bills and minimum loan payments on time. When possible, sign up for automatic payments to minimize the risk of missing payments. 
  • Sign up for Experian Boost: Experian Boost is a free service you can use to get credit for your cell phone and utility payments. On average, users who sign up improve their credit scores by 13 points. 
  • Keep your credit card balances low: Your credit utilization — or how much of your available debt you use — accounts for 30% of your credit score. Pay down existing debt and use your credit cards sparingly to bring up your score. 
  • Don’t open new credit accounts: Every time you open up new accounts, your credit score will drop. New credit makes up 10% of your credit score, so only open up a new account when you really need it. 
  • Review your credit report and dispute errors: Review your credit report for free at AnnualCreditReport.com and look for errors, such as fraudulent accounts opened under your name. If you see any issues, dispute them with the credit bureaus and have them removed from your credit report. 
   

How to Increase Income

If you’re a recent college graduate, your income may be less than the minimum required for student loan refinancing. To boost your earnings, consider these strategies:   
  • Ask for a raise: If you’ve been at your job for over a year or more and have done good work and received positive feedback, it may be time to ask for a raise. The average raise is 3.3%, which could give you the additional income you need to qualify for a loan. 
  • Learn new skills: If a raise isn’t possible due to the economy or because your company isn’t performing well, try to learn new skills that would allow you to secure a promotion or a new position at another company. 
  • Take on consulting work: If you have some extra time, consult or freelance on a part-time basis for additional income. For example, you could lend your social media expertise to startups, design marketing plans for entrepreneurs, or do graphic design work for local businesses. 
   

How to Build Credit History

If you don’t have a lengthy credit history, it can be difficult to qualify for a loan. To start building your credit history, follow these steps:   
  • Ask a friend or relative to add you as an authorized user to their credit card account: If you have a parent, relative, or friend with good to excellent credit, ask them if they will add you as an authorized user to their credit card account. When you become an authorized user, you get access to their credit history and credit line, instantly lengthening your own credit history. Just make sure you set guidelines on how the credit card should be used and how you’ll repay them for any purchases. 
  • Apply for a credit builder loan: With credit builder loans, you take out a loan, and it’s held for you in a savings account. You make payments toward the loan each month. After the loan is paid off, the lender releases the money to you, so it can help you build your savings, as well. Many financial institutions offer credit builder loans.
  • Open a secured credit card account: Without an established credit history, you may not qualify for a traditional credit card, but you can get a secured credit card account. With a secured card, you put down a security deposit that serves as your credit limit. As you make payments, your payment history is reported to the credit bureaus, establishing your credit and improving your credit score. 
   

Refinancing Your Student Loans

Improving your credit history, boosting your credit scores, and increasing your income can take time. But within six to 12 months, you can see results and meet ELFI’s refinancing requirements. By refinancing your loans, you can save money and pay off your debt ahead of schedule.    When you’re ready, you can get a rate quote without affecting your credit score.*  
  1Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 2/7/2020 and 2/21/2020. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.   *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.