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No one likes having debt hang over their head. That’s doubly true when it comes to student loans. According to a University of Southern California study, parents take on an average of $21,000 in debt for their children’s education. That debt could impact your retirement planning or sideline other dreams and goals.
So, how can you solve the problem? There are a few options available. Look over these five tips for ideas to help you pay off the student loans you took out for your kids faster.
Getting a lower interest rate on your loan can help you pay off the principal faster. You can also reduce the length of the loan, although this will likely increase your monthly payment amount. Some student loan refinancing options allow parents to refinance immediately, while the student is still in school.
Take the time to weigh the pros and cons of refinancing federal Parent PLUS loans if you have them. It could mean losing some of their benefits, like income-driven repayment plans.
Most people make one payment per month toward their student loans, totaling 12 payments in a given year. However, if you could make one extra payment each year over the life of your loan, those extra payments would help you pay off your loan faster. You can do this by splitting your monthly payment into bi-weekly payments instead.
Consider this example: Your monthly student loan payment is $200. If you made this payment once a month, you'd pay $2,400 over the course of a year. However, let's say you split that $200 monthly payment into a $100 payment every other week. You'd end up paying $2,600 over the course of the year, which is a $200 difference than if you stuck to one monthly payment. That extra $200 over the course of a 10-year loan would add up to $2,000 in extra payments.
Note: Be sure your additional payment is not being treated as an early payment for the next month. You’ll want to confirm that the funds are being applied to your loan right away to help lower your principal. Also, check your loan agreement to be sure there are no penalties for paying off the loan early.
When you make a monthly payment on your loan, the funds first go toward the interest accrued over the period. If you can pay the principal off first, it lowers the overall amount of interest you’ll pay over the life of the loan. The majority of your monthly payments tend to go toward interest in the first few years of repayment.
The Consumer Financial Protection Bureau recommends reaching out to your provider to provide instructions on how your money should go toward paying off the principal versus the interest.
From tax refunds to pay raises, consider allocating any new money to paying off student loan debt. Sure, you could spend it on a night out or the latest tech gadget, but if you’re looking to pay off student loans faster, it might not be the best use of the money. It might be less exciting, but it’s a smart way to knock down your loan principal.
Taking a hard look at your budget is essential to paying off student loans faster. Find places to trim expenses; then, use those funds to increase your monthly payments. It could be as simple as eating out one or two times fewer per month. Or, maybe you decide to put off buying those shoes or a new mattress. Making these sacrifices can be easier knowing the money is going to a good cause.
Paying off student loans faster could open up a window of opportunities, whether that means increasing your retirement contributions or saving for other life goals like a dream vacation or long-awaited home renovation.
Want to learn more about refinancing the student loans you took out for your kids? Learn more about Education Refinance Loans for Parents.
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