How to Pay Off Your Student Loans Early and Pay Less in the Process

Student loans are debt that many millennials face. Paying off your loan may seem impossible when you first graduate, but by using this helpful tips, you can pay off your student loans early and pay less in the long run.

How Student Loans Work

Loan companies make their money from interest charges. For example, if you take out a $10,000 loan that has a 5% annual interest charge, your monthly payments for 10 years would be $106.07. You would be paying $273 a year in interest charges alone, meaning over the course of the 10 years it would take you to pay back your loan, you would pay $2727.68 in interest payments alone. Although you’ll never be able to lower your principal payments, you can lower your interest charges by making more than minimum payments.

How to Pay Less Interest on Your Loans

Luckily there are several easy ways to lower how much interest you will pay over time and ultimately pay off your loans early which will save your thousands on interest charges.

Make Small Payments When You’re Still in School

Especially if your loans start accruing interest charges before you graduate, it is better to begin paying small amounts toward your student loans. Even if that payment is $50 a month, it can significantly help lower your future interest charges. If putting away $50 a month seems impossible, putting aside $12.50 a week toward your student loan can be manageable. 

Avoid Using Auto-Pay

Student loan companies want your account to be on auto-pay because they don’t want you to think about making additional payments or payments that are more than the monthly minimum because they profit from your interest charges. By going in every month to pay your bill, you can actively choose to pay more. Anything over your monthly minimum goes straight to your principal.

Make Additional Payments

Making an additional payment on your student loan even once a year could save you money. Using our example of the $10,000 loan with an interest rate of 5%, making one additional payment a year could save you $309 in interest over the course of 10 years.

Pay More Than the Minimum

Paying more than the minimum can help you as well. Even if you increase your monthly payments by $50 a payment, you’ll be paying $600 more a year toward your principal. By doing this, it would take you a little over six years instead of 10 years to pay off your student loans and would save you about $1100 in interest charges.

How to Budget for Your Student Loan Payments

There are several ways to get creative about budgeting. Try these tricks to get ahead of the game.

  1. As soon as you get paid, make a payment on your student loan. This way, you will always have the funds to make an overpayment.
  2. Live at home for as long as possible or rent an apartment with roommates to keep your monthly living expenses down.
  3. Try to cut extraneous monthly spending with small changes like making your own coffee at home, packing your lunch, and limit going out.
  4. Shop for clothes during sale and clearance events.
  5. Use any monetary gifts, overtime, or bonuses from work to make additional payments to your student loans.
  6. For more detailed budgeting tips, see our blog with building a budget you can actually like with.

Paying more than the minimum monthly payment towards your student loans and/or by making extra payments on your student loans may seem difficult at first. But by doing so, it is ultimately the best way to pay less towards your student loans and to pay them off faster.