College · May 14, 2020

Pay Off Student Loans With These Best Practices

Paying off student loans can feel a little like climbing a mountain. You know it's going to take a lot of hard work to get to the top. And sometimes, it's hard to see which is the most direct route to your destination. 

Just as different mountain climbers might choose different paths, there isn't one loan repayment strategy that works for everyone. You should select the approach that makes sense for your circumstances. The best way to pay off student loans depends on factors like how much income you have, whether you can afford to make extra payments and what profession you're working in.


Make a budget

First, set up a budget to see how much money you can afford to dedicate to loan repayment each month. Tally up your living expenses, including:

  • Rent
  • Utilities
  • Car payments or transportation
  • Food
  • Healthcare
  • Necessary clothing
  • Any debt payments you're already making, including the current payment toward your student loans

Then compare that total with your monthly take-home pay. The portion of your income that's left over after you've covered expenses is your discretionary income—what you'd otherwise use as spending money. Instead of spending it all or putting it into savings, you can take some of it and put it toward your loans.

Pay off loans faster

Ideally, your budget leaves more than enough room for your minimum monthly student loan payment. In this case, the best way to pay off student loans is to pay off more than you need to each month. You can do this by making extra payments or making a larger payment than you owe. Just check with the lender to confirm the additional money you pay is going toward reducing your balance, rather than being carried over to cover next month's payment.

Paying off your loan faster reduces the amount you spend on interest over the course of the loan. To save as much as possible, you may want to prioritize paying off higher-interest loans first and make only the minimum payments on your lower-interest loans.

Make your payments more manageable

Your budget might not allow you to set aside anything extra for repayment—and if your income isn't high enough, meeting the minimums can be a struggle, too. In this situation, you can try to increase your income by working extra hours or cutting expenses. But you may also need to reduce your monthly payments so that they're more affordable. There are a few ways to do that.

First, if you have certain federal loans, you may qualify for an income-based repayment plan or a pay-as-you-earn plan. These plans limit your payment to a fraction of your income—usually 10 to 15% of discretionary income, depending on the plan. This can be a big help because it keeps your payment relatively low. The downside is that it may take you longer to pay off the loan, and you may pay more in interest because you aren't paying down the principal as quickly. However, you can switch to a higher monthly payment later if your financial circumstances change.

Another option is to refinance or consolidate your student loans. Refinancing involves taking out a new loan with a new lender. This loan is used to pay off your student loans. Then, you make payments to the new lender. Your new loan may give you a lower interest rate, a lower monthly payment, or more time to pay off your loan. However, you may need a good credit score to qualify for a favorable refinancing offer. And if you refinance federal student loans, income-based repayment options are no longer available. You may also be able to consolidate the outstanding balance from your multiple student loans into a single one, which could give you the peace of mind that you have just one loan with a single interest rate and one monthly payment.

See if your employer offers student loan repayment benefits. Some employers will match your student loan payments up to a certain amount. Others offer a monthly payment or will reimburse you for part of your payments.

You may be able to get part of your student loans forgiven through the Public Service Loan Forgiveness Program if you're working for a government agency or an eligible nonprofit organization, or if you're volunteering through the Peace Corps or AmeriCorps. There are also loan forgiveness and loan cancellation programs for teachers at the federal level and in certain states. If you have federal student loans, consider signing up for automatic withdrawals. You get a 0.25% cut in your interest rate if you enroll in automatic payments.

The best way to pay off student loans depends on your needs and your situation, and the important thing is to know your options and select the smartest one for you. 

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.