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Updated December 7, 2023

The Ultimate Guide to Paying Off Your Student Loans

The Ultimate Guide to Paying Off Your Student Loans

The Ultimate Guide to Paying Off Your Student Loans

Mike Zaccardi, CFA, CMT

Mike Zaccardi, CFA, CMT

Personal Finance

Did you know that the average university grad faces a student loan bill of more than $33,000 as they walk across the stage to receive their diploma? You are not alone if you feel daunted by a large debt burden before you even land your first real job. 

What’s more, it’s common for older members of Gen Z and the millennial generation to continue carrying student debt via both government and private loans throughout their early working years. There are many ways to go about reducing what you owe, and doing so can actually make you a better long-term saver and investor.

There’s more good news. By following any number of effective strategies, you can lift the financial weight of intimidating student loan debt quickly and without it eating too much into other spending and saving buckets. Let’s outline some of the best ways to pay off student loans fast.

A piggybank on a table surrounded by books and coins

Pay More Than the Minimum

Here's the magical trick to wiping away debt of any kind: Put more money toward the principal balance. Just as Albert Einstein quipped that compound interest is like the eighth wonder of the world, the same logic goes on the flip side – when compounding works against you, then being a ruthless saver is the key to gaining financial freedom sooner. 

The overarching goal is to make more than the minimum required monthly payment since doing so significantly reduces the total interest you pay over the life of the loan. It also shortens the repayment period - even small additional payments can add up over time, making a substantial difference in the long run.

Inside scoop: Be sure to tell your debt service provider that your extra payment amount should be put toward the principal balance. Some nefarious loan companies may try to pull a fast one by applying any additional payments to later months, which wouldn’t help you clear your debt sooner. Another tactic is to make bi-weekly payments rather than monthly amounts.

Build Your Budget

Money doesn’t just come out of thin air, though. You must ensure your budget game is tight. We have seen some of the best long-term investors begin by diligently repaying student debt as it requires the very same attributes: planning, discipline, execution, and responsibility. 

Here’s what to do: tally up your monthly income and expenses to determine how much dough you can comfortably direct to your student loans. That’s the first step toward gaining control over your debt (and not the other way around).

Practically, if you are like the typical person fresh out of school, owing $30,000 at a 6% interest rate, then your monthly repayment amount is about $333. Now, if you have high-interest credit card debt (above 6%), then making that a priority to pay off is key. Otherwise, establishing a pay-down plan to wipe out your student loan balance should be your focus. If you can manage to put $580, not just $333, toward your debt, then you will claim victory over what you owe in half the time.

Employ the 50/20/30 Technique

Wouldn’t it feel great to be free and clear of student loans by your mid to late 20s? The 50/20/30 method gets people there, and it builds on the first two strategies. Successful savers allocate 50% of their after-tax income to necessities, 20% to debt repayment (and overpayments), and 30% to discretionary items (yes, you can live life and have fun while paying down debt!). Will this work for you? Give it a try, but at the very least, pin down an action plan that works in your situation. Striking a balance between crushing your debt and enjoying your 20s is the mission.

So, as for that 20%...consider establishing automatic payments from your bank account to the loan servicer. Much like setting up automated recurring investment purchases, the more you can “set it and forget it,” the less of a mental hurdle it becomes. Another behavioral trick? Now and then, after putting more toward your principal amount, recalculate what you owe – seeing your dwindling debt balance often augers the motivation to keep going!

Smartly Cut Back Expenses

The typical college graduate earns about $60,000 annually at their first grown-up job. We’ll say that means $4,200 monthly after taxes. Twenty percent of that is $840, so this is doable. While you should almost always snatch the 401(k) match from your employer, save & invest through a Health Savings Account (HSA), and consider the benefits of IRA investing, tackling debt requires responsibly saying “no” to certain spending categories.

Cancel unused monthly subscriptions, negotiate your bills, switch to more cost-effective streaming and cell phone plans, and weigh the pros and cons of large one-time discretionary expenses (maybe keep driving that old car from college for a few more years); budget boosters come in both big and small varieties. Always remind yourself that putting an added $50 per month toward your debt can save you upwards of $1,500 of interest over the life of your loans.

Focus on Growing Your Income

Personal finance gurus always seem to harp on cutting back on spending in order to build a high savings rate and grow wealth. Sometimes, however, setting your eyes on the income side of the ledger is more effective, and that’s particularly likely for recent college grads. Why so? If you are in your 20s, then you have a super high amount of “human capital” - it’s a fancy finance term for the value of your future work. While old retirees might have a large nest egg (aka “financial capital”), they have very little value in the form of what they can contribute on the job due to old age.

Your 20s are an ideal time for building skills, focusing on landing promotions at work, switching employers for a higher salary, and being flexible about where to work and even in what field. The truth is, it’s usually pretty hard to come up with a few thousand extra dollars to pay off student debt faster, but pouncing on a new job opportunity that pushes up your salary by an extra, say, 10% is quite common these days.

Still In School? You Can Get Started Now.

In general, you want to avoid private student loans like the plague. Loans not subsidized by the government often come with much higher interest rates, and many types of borrowings accrue interest before you graduate. Compounding interest thus works against you in a particularly damaging way if you’re not careful. A side gig while in college can generate extra income to avoid so-called “capitalized interest” mounting – just a small plan of attack while on campus can save you stress on the job later on.

Consolidating Loans, the “PSLF,” and Workplace Benefits

Our government overlords automatically place federal loans on a 10-year repayment schedule. Since public student debt is usually way better than private, sticking to their plan can suffice. Although federal loans offer income-driven repayment options that can reduce monthly payments, they extend the repayment timeline to 20 or 25 years, and you do not want to carry that burden into your 40s. Moreover, don’t be tempted by loan consolidation sharks that offer lower monthly payments – those, too, wind up stretching out a payback period by many years.

We find that some workers are eligible for the Public Service Loan Forgiveness (PSLF) Program. If you’re employed by a government agency or not-for-profit organization in the US, you should check this out. There are certain criteria to meet, but there is no better way to bring down debt than by having it wiped away for you.

Finally, the last trick is not a trick at all - It’s now becoming table stakes in some industries and new companies. Companies entice younger workers by offering help via reimbursements for student loan repayments, much like how a 401(k) matching contribution works. Definitely check with your HR Department or, if you are on the job hunt, inspect benefits packages and never be afraid to ask the company for student loan reimbursement assistance.

The Bottom Line

Paying off substantial student loan debt can be a daunting task, but it is achievable with the right strategies. Effective budgeting techniques can free up cash to put toward your principal balance so that your slate is cleaned quicker, while focusing on building human capital can grow your income faster. Starting your debt paydown sooner by smashing private loans and higher-interest-rate borrowings first reduces overall interest owed, too. Finally, thinking outside of the box like with programs such as the PSLF and benefits at work can be huge wins that allow you to then focus on investing for the long haul.

Whether you want help saving money for a short-term goal (like a down payment), or investing for the future, Allio can help. Head to the app store and download Allio today!


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