“Diligence is the mother of good luck.” – Benjamin Franklin
If you’re one of the 37 million Americans with student loans, you know it’s going to take a lot more than a few four-leaf clovers to make your debt disappear. You wouldn’t rely on winning the lottery in order to pay your loans, would you? Unfortunately, neglecting to understand the various loan repayment options can be just as foolish, because you may be missing out on opportunities to reduce or even eliminate your debt burden. Essentially, leaving your loans to chance could mean leaving money on the table.
Rather than wait around for good fortune to find you, take a proactive approach by seeing if one of these three options apply to you:
1. Spend money to save money . All education loans, whether federal or private, allow for penalty-free prepayment, which means that you can pay more than the monthly minimum or make extra payments without incurring a fee. Prepaying may sound painful, but the benefits can be huge. The more you do it, the sooner you’re done with your loans – and the less interest you spend over the life of the loan.
Let’s say you have a $100,000 student loan balance at a 6.8% interest rate and 10-year term. If you increased your monthly payment by just $100, you’d save about $5,600 in total interest and pay off your loans about a year early. Or perhaps you pay down an extra $2,000 per year using your annual bonus, saving yourself about $7,400 in interest and paying off your loans about 1.5 years early. Every borrower’s situation is different, but you can do the math on your own loans with a calculator like this.
One thing to note – prepaying is most effective when the extra cash is applied directly to your principal, rather than being earmarked for future payments. It’s best to check with your loan servicer to see what their policy is before increasing or adding extra payments.
How to get lucky: Commit to increasing your monthly student loan payment each time you get a raise and/or putting a percentage of every bonus toward your loan balance.
2. Recalibrate your rate . One of the fastest ways to slash your student loan burden is to lower the interest rate on your loans, which can only be accomplished through the act of refinancing. In addition to reducing the amount of interest you pay on your loan over time, refinancing can allow you to make lower monthly payments or shorten your payment term (so that you can be done with your loans sooner).
Student loan refinancing is still a relatively new option, so many borrowers who could be eligible to refinance aren’t even aware the opportunity exists. Which is unfortunate, because the savings can be significant. For example, the average SoFi borrower saves $9,400 when they refinance with us.* In addition, some private lenders offer additional benefits to borrowers when they refinance, such as complimentary career coaching and entrepreneurial support.
How to get lucky: When shopping around for a refinance lender, be sure to compare interest rates as well as other potential benefits.
3. Ask for forgiveness. What borrower hasn’t fantasized about winning the lottery and paying off their loans in one fell swoop? Unfortunately, you’re more likely to get hit by an asteroid than win a seven figure jackpot. So what’s the next best thing? How about making your student loan balance magically disappear.
It sounds too good to be true, but this is the basic idea behind student loan forgiveness. Surprisingly, there are quite a few ways to get your loan slate wiped clean, but the most well-known one (and the one that applies to the most people) is the government’s Public Service Loan Forgiveness (PSLF) Program. Under the program, borrowers who work full-time for a qualifying public service organization may be eligible to have federal loans forgiven after 10 years of on-time monthly payments.
Before you skim over this section and assume that PSLF won’t apply to you, consider this: The CFPB estimates that about one in four working Americans has a job that meets the definition of “public service”, and yet they believe a “substantial sum” is left on the table by borrowers who don’t take advantage. This may be because the definition is broader than what most people would expect – for example, soldiers, doctors at non-profit hospitals and public defenders are all examples of professions that may qualify a borrower for PSLF.
How to get lucky: Find out if you qualify for PSLF or other forgiveness programs by contacting your student loan servicer.
*SoFi average borrower savings assumes 10-year student loan refinancing with a weighted average rate of 7.67% and a loan balance of $86,000, compared to SoFi’s median 10-year rates of 5.875% (with AutoPay).