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Treat the loan like a mortgage
If you can afford it, treat the loan like a mortgage and simply make larger payments to cut the principal more quickly, says financial planner Allan Katz, CFP professional, president of Comprehensive Wealth Management Group in New York's Staten Island.
For example, a $25,000 student loan with 6.8 % interest with a 10-year payback period would cost $288 a month. Paying $700 a month instead of $288 enables the borrower to repay the loan in just over 3 years, Katz says.
By doing this, borrowers are "paying the principal down more quickly, which results in lower interest charges," he says. By paying extra, the entire loan would cost $28,000 rather than $34,560.
Another strategy is adding payments and sending in checks every 2 weeks rather than monthly.
Once that college loan is repaid, the benefits proliferate. "It's one less debt you owe. The money you make is now free to be invested and applied to owning a house, saving for retirement or putting a child through college," Katz says.
Create a 3- to 5-year plan
Clayton Shearer, a wealth manager at A&I Financial Services in Englewood, Colorado, urges clients to create a 3- to 5-year plan to pare college debt. Knowing exactly when the loan ends is comforting for many clients. Clients "have a goal in place, they're committed to it and they know exactly what to pay monthly," Shearer says. Paying it becomes part of their monthly routine comparable to submitting checks for mortgages, cable TV and telephone.
For example, 2 clients had $50,000 combined in college debt and were making around $100,000 a year jointly. To pay it off, they established a budget and cut back on spending. Their budget was helped by 2 sizable bonuses from work, resulting in their sending $800 per month for 2 years to cancel their college debt. Had they not prepaid, it would have taken about 15 years to pay off the loan. The result, Shearer says, is clients "get debt-free and have a load lifted off their shoulder."
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Establish a college repayment fund
If a graduate can save an additional $100, $200 or more a month and deposit it into an account via automatic savings, it can speed up repayment. Having money moved automatically is effective because it's forced savings, Katz says. It enables people to set aside money to grow that otherwise would be spent on TVs or iPhones, Katz says. Just make sure to set up an account that will be used only for paying back your college debt. Don't use checking or savings accounts you already have because you might use that money for something other than your student loan.
When you create the account, you can tie it to mutual funds, saving accounts, annuities and stocks that offer dividend reinvestment plans. The most effective way to ensure that the cash saved multiplies is to let the money grow until it accumulates into a lump sum and then transfer it a chunk at a time to pay off the loan balance. "How long somebody must save depends on the returns they get, as well as the amount they are investing and how much they owe," he says.
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Of course, there's risk associated with savings in investments like mutual funds because the stock market is volatile and can fall. Typically, over the span of a 5-year or longer loan, stock market investments recover and grow, he says.
Start early with a part-time job in college
Earning cash while attending college is one way to be proactive about keeping college debt in check, says Charles Sachs, a principal at Private Wealth Counsel in Miami.
He says it's a win-win because "getting a paid position while still in school generates some money that offsets loans and builds invaluable industry-specific knowledge."
If a student can put away $1,000 a month, "that's $12,000 (a year) less in student loans and not having to take that money out in loans -- a big savings," Shearer says.
Working part time while attending college can also strengthen a student's ability to repay a loan, Shearer says. It develops discipline, provides real-world experience and earns income to lower future debt obligations.
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Avoid the usual traps
The most compelling barrier stopping people from repaying loans faster is the need for "instant gratification," Shearer says. People can lose sight of their future financial goals, live for today and "fall off the budgetary wagon," he says. The most effective way to reduce debt is to plan ahead, make some sacrifices, focus on future financial goals and delay instant gratification.
Katz agrees. Maintaining financial discipline is a difficult hurdle for many people, he says. "Most people don't have the discipline to save. Most people spend like goldfish eat, which is nonstop," Katz says.
The people who succeed at cutting college debts are those who "live within their own means and are conscientious about saving," Katz says.
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