The country’s trillion-dollar student loan debt is growing ever larger. With the average 2015 undergrad carrying a balance of $30,100, the burden of these loans are causing Americans to delay major life milestones, including homeownership and marriage.
Some repayment plans have terms as long as 20 years to pay off entire balances. That’s 240 payments that could be going elsewhere, like into a retirement savings account or toward a down payment for a home.
Those looking to be free from student loan debt faster can try Bankrate’s two repayment strategies: the Two-Latte Method and the Payday Method.
Why you should consider a student loan payoff strategy
The issue with making only minimum payments on any type of loan is the amount of interest you rack up over time.
By making extra payments, you’ll be able to cut down the total time you spend funneling money into the loan and save on interest. Less time paying student loans means more time to focus on other long-term investments, like purchasing a home or saving for retirement.
The Payday Method
Using this strategy, you’ll make biweekly payments towards your loan that, together, equal the full minimum required monthly payment. For many, biweekly payments align with company pay cycles, so you can devote smaller amounts from each paycheck rather than a bigger chunk from one.
The real benefit of this method, though, is the two extra payments you’ll end up with at the end of every year. Since there are 26 pay cycles throughout the year, you’ll end up making 13 months’ worth of payments in just 12. This can reduce the lifetime of your loan and, as a result, dramatically cut the total interest paid.
Over a 20-year loan period, you’re essentially reducing your payment by 20 months, or almost two years. You can use Bankrate’s Amortization Schedule Calculator to see how this reduces your individual interest accrual.
The Two-Latte Method
If you can afford it, consider adding any additional funds you can spare towards your balance each month. For example, if a coffee fiend were to cut down on just two lattes each month, equal to roughly $10, and direct that cash toward student loans, they could save hundreds of dollars over the lifetime of the loan and repay it faster.
The average federal student loan interest rate for undergraduates from 2006 to 2018 was 4.81 percent. Say you have a total balance of $30,000, just short of the average balance mentioned earlier.
On a 20-year fixed plan, your monthly payment is estimated to be $195 by this Sallie Mae calculator. Over the life of the loan, you will pay $16,740 in interest and a total of $46,740.
Here are a few examples of how some extra cash toward this loan could save you big:
Example 1: Extra $75
By paying an extra $75 each month, your loans will be paid off seven years and eight months earlier than under the standard plan. You will save $6,954 in interest payments and your new loan total will be $39,786.
Example 2: Extra $40
By paying an extra $40 each month, your loans will be paid off five years earlier than under the standard plan. You will save $4,629 in interest and have a new loan total of $42,111.
Example 3: Extra $10
By paying an extra $10 each month, your loans will be paid off one year, seven months earlier than under the standard plan. You’ll save $1,474 in interest and have a new loan total of $45,266.
How one borrower did it
Devin Bradshaw, a 27-year-old data consultant in Nashville, paid off his $25,000 student loan balance in late December 2016, about two years after finishing his degree.
While Bradshaw was single, his $250 per month payment was consuming about 10 percent of his monthly income. However, he wanted to get rid of the debt as soon as possible so he could focus that money elsewhere. He decided to double his monthly payment — something he acknowledges was a hefty amount, but worth it.
“I just didn’t want to have to worry about it anymore,” Bradshaw says. “It was tough but I knew I was going to pay off those loans sooner, so I didn’t mind.”
What lenders say
Not all federal loan servicers apply the same process to extra payments. If you want to incorporate one of these methods into your student loan repayment plan, talk to your lender or find more information on your lender’s website. Get the answers in writing, then check to make sure the extra payments are being applied correctly. To help you get started, here’s what three of the most common federal loan servicers recommend:
Keith New, director of public and media relations for Fedloan Servicing, says, “Borrowers can pay extra at any time. They can choose where we apply the extra funds, can set up standing payment instructions or they can allow the servicer to prorate the extra funds across all loans.”
If you’re a Fedloan Servicing borrower and want to use the Two-Latte Method, you can choose where you want your extra payments to go and track them using the servicer’s website or mobile app.
For borrowers looking to implement the Payday Method, New says they may pick a monthly due date that best suits their pay schedule. “If a borrower prefers to make biweekly payments, we’d recommend a due date later in the month,” he says. This ensures both payments are submitted in time to satisfy the full monthly installment.
Nelnet’s website says, “You can always pay more without penalty, which will reduce your total cost of borrowing and save you money in the long run.” Nelnet or Great Lakes borrowers who want to implement the Payday Method or Two-Latte Method also have options for where their extra payments go.
Nelnet’s website explains that any extra payments beyond the current amount due will automatically be directed toward your highest-interest loan. If the extra payment is enough to cover your next payment due, that payment will show $0 due for that loan. You can pay extra without affecting what you see in monthly payment statements or choose specifically where to direct each payment by submitting one-time or recurring extra payments with special payment instructions on your account.
According to Nikki Lavoie, a spokesperson for Navient, extra payments help Navient borrowers pay off loans faster and reduce their total interest. As an example, she says, “You graduated with $28,400 in student loans at 5.05 percent and can expect to accrue about $4 per day in interest costs initially. You might consider ways to shave off an equivalent amount per day in your budget.”
Lavoie adds: “If you can’t do that much regularly, pay extra whenever you can.” With the Two-Latte Method, you can adjust your extra payments to work with your budget.
According to Lavoie, extra payments may result in your account status being “paid ahead” for the next month. However, you should still make that next month’s payment as usual if you’re looking to accelerate your payments. When you make an extra payment, you can also choose whether you want to allocate it toward your loan with the highest interest rate, highest balance or lowest balance.
Find more information regarding your specific loan, contact your federal loan servicer directly.
What experts say
Paying off student loan debt early isn’t just a way to free yourself from a monthly payment; it can also help you reach other financial goals down the line.
Naimesh Patel, general manager of personal and student lending at PNC, says everyone’s financial goals and situations are different, but thinking about the bigger picture can help put student loan debt into perspective.
Patel says the three main benefits of making extra payments on student loans include: reducing interest paid over the life of a loan, shortening the term of the loan and freeing up time and money to invest in other long-term goals, such as buying a house or saving for retirement.
“Generally speaking, every little bit helps,” Patel says. “When you think of any loan you’re trying to pay off, any amount you pay over the minimum amount will help you pay the loan off faster.”
Keep in mind, however, that neither the Payday Method or the Two-Latte Method is applicable if you’re on a forgiveness program. Under the Public Service Loan Forgiveness program, any additional payments made each month do not count toward forgiveness.
Those looking to generate more income each month can consider picking up side gigs, like driving for Uber or Lyft, or writing reviews online. Click here for more easy ways to make some extra money.
With reporting by Bankrate’s Kelly Anne Smith