Student loans are not something to rejoice about when you see that first statement in the mail. While you may have taken out student loans to help you pay for college to get a good education, you will find yourself in a sea of debt once you graduate. The more money you borrow, the more you have to pay back in the end and some students learned that the hard way.
One of the toughest things borrowers learn is that they do not just have to pay back the amount they borrowed, but also the fees that the lender charges AND interest. Wait, what? It is true and can be scary as you watch that $30,000 loan turn into a $75,000 loan.
Fortunately, there are ways for you to pay back your student loans and save money at the same time. Let’s take a look below and see which option will work best for you.
Pay Your Higher Interest Loans First
When it comes to your student loans, the order in which you pay them can help you save a lot of money. In fact, you should ALWAYS evaluate the loans that you have and then create a plan to pay down the debt.
For example, you should pay off your student loans with the highest interest rate FIRST. As a rule of thumb, private student loans have higher interest rates compared to loans from the Department of Education. While these loans may be the smaller amounts, you will end up spending more on them because of the high interest rate, so it only makes sense to pay them off first.
Once you eliminate your higher interest rate loans, you can then focus on the other loans and making additional payments on them. It is important that you always pay the minimum monthly amount due on ALL of the loans, no matter their interest rate. You want to allocate any additional funds to the higher interest rate loans first AFTER the minimum payment.
Make Additional Interest Payments
If you have some extra money throughout the month, you should make additional interest payments to help keep your interest from accruing on your student loans. One of the best ways to prevent a buildup of interest payments is to make the interest payments while you are in school. The average interest payment is about $50 to $100, so it is doable and you will save yourself not only a headache, but also the extra expense.
Put More Money Towards Your Principal Payments
The easiest way to save money on your student loans is to pay your student loans faster and in larger amounts. Unfortunately, it is not always possible for all borrowers to do this, but if you can, make sure you do.
Many students will take any extra money they have and apply it to their student loan debt because that is less interest that needs to be paid over the course of the loan. When you send in extra money, it is applied directly to the principle balance of the loan, which reduces how much you owe overall.
To help you understand how much you can save, let’s take a look at a scenario where you owe $15,000 with a 5.5 percent interest rate and a loan term of 10 years.
Your total monthly payment would be $163. If you were to send in an additional $100 per month for a total monthly payment of $263, you would save $2,108 in interest over the course of the 10 years.
Don’t Take Advantage of the Grace Period
While a grace period sounds nice on paper, it can actually hurt you a little bit, if you do not pay attention to it. The problem with the grace period is that interest still accrues on your student loan during this time, so while you may not have to make monthly payments for six months, you are building up interest over those six months.
You have two options here and both will benefit you. The first option is to go ahead and make your monthly payment. If you do not know how much your monthly payment will be, try to use a loan calculator online or call your loan servicer to find out.
The second option is similar to the first, but if you are not prepared to pay the full amount just yet, you should, at minimum, make the interest payments during the grace period.
Claim the Deductions You’re Entitled To
Did you know that you can actually receive a benefit for paying the interest on your student loans? It is true. In fact, when you file your taxes, you can reduce the amount of income tax you owe up to a total of $2,500 if you make interest payments on your student loans.
In addition, there are other tax credits and deductions that are available to you, if you purchase supplies for college and pay for your tuition.
Before you start to take any of these claims and deductions, you need to make sure that you are entitled to them. For instance, to claim the student loan interest deduction, your gross income needs to be at $80,000 or below.
Final Thoughts on How to Save Money on Your Student Loans
Each one of the strategies above will help you save money on your student loans as you work to pay them back. In addition to these options, you can also choose to refinance or consolidate your student loans, which will help you save thousands of dollars in interest over the course of the loan.
Just as there are options to save money, there are some options that will not save you money. One of those options is simply just sticking to the standard repayment plan offered to you. In fact, if you stick with this plan or one of the plans that offers a repayment term of 20 years, you will end up paying almost double the amount you borrowed and this can lead to a financial strain.
If you ever find yourself in need of a different repayment term, speak with your loan servicer to find out what options are available to you.
David Chen is the Owner of MillennialPersonalFinance.com. At MPF, David writes about saving money, making money, and occasionally about parenting. David is an engineer by trade and blogger by night,