If there’s one obstacle that prevents most millennials from investing, it’s the burden of college loans.
The average student debt for 2016 graduates is a record $37,172, up 6.05% from a year earlier, according to Mark Kantrowitz, publisher and vice president of strategy for Cappex.com, a college scholarship website.
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So how can graduates get out from under that debt quickly? We spoke to investment managers and financial planners for their top tips to become free of student loans. Here are five ways to pay off student loans quickly:
- Treat the loan like a mortgage.
- Create a 3-5 year plan.
- Establish a college repayment fund.
- Start early with a part-time job in college.
- Avoid the usual traps.
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 three years, Katz says.
Another strategy is adding payments and sending in checks every two 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 three- to five-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.
For example, two 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 two sizable bonuses from work, resulting in their sending $800 per month for two years to cancel their college debt. Had they not prepaid, it would have taken about 15 years to pay off the loan.
Establish a college repayment fund
Having money moved automatically into savings is effective because it’s forced, Katz says. It enables people to set aside money to grow that otherwise would be spent on clothes or dining out, 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. Compare savings accounts and put your money in an account with a higher yield to maximize your savings.
Start early with a part-time job in college
Getting a part-time job while attending college is one way to keep college debt in check because it generates money to help offset student loans.
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.
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 debt are those who “live within their own means and are conscientious about saving,” Katz says.
If paying back your student loan debt is slow-going, you may be paying too much in interest. If all else fails, consider refinancing if you have private student loans. You can compare refinancing rates with companies like Credible and SoFi to see if doing so will save you money in the long run.