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    Reducing Student Loan Debt

    Student loan debt is a fact of life for many. But if you take a few simple steps, like prepayment and paying high-interest loans first, you can pay those loans off sooner than you think.
    Updated: June 9, 2016

    What You'll Learn

    • Why you may want to pay more than you owe each month (seriously!).
    • How to prioritize your loan payments.
    • Pros and cons of consolidation.

    So you're out of school, living on your own for the first time, and entering a job market that's shaky at best. On top of all that, you've got student loans to pay back—and that grace period is nearly up. Or you've been out of school a while, and you're trying to save for a new home, a new baby, or retirement—all while paying back your loans.

    Yes, living with debt hanging over your head can be stressful, but take a deep breath. For better or worse, most of us will deal with student loans at one point or another in our lives, so you're not alone. And there are several ways you can pay down your student loan ahead of schedule.

    Overpay To Reduce Your Principal

    One of the easiest ways to reduce the life of your loan is to overpay—that is, to send extra money on top of your minimum payment. This may sound impossible if you're strapped for cash, but this is a case where a little bit truly goes a long way.

    At the beginning of most loan repayment schedules, your initial payments (i.e., for the first few years) are almost all interest (if not ALL interest), with only a fraction going toward your principal (the amount your originally borrowed). However, if you pay anything above your minimum payment, that extra money may be applied to your principal. Some loan holders do this automatically, and some apply the extra money to your next payment, which really doesn't cut down on the interest that you're accruing. Be sure to check with your loan holder to request that any extra money goes toward your principal balance, if it isn't already.

    Here's an example: If your monthly payment is $100, and you pay $115, that extra $15 may go toward your principal. If you're able to overpay with any regularity, you will knock down your principal much faster than if you only make the minimum payments—and you will significantly decrease the amount of interest that you accrue and the length you repay your loan.

    You're always allowed to prepay your federal student loans without penalty; however, private student loans are a different story. These sometimes feature a "repayment fee," which is just what it sounds like: a fee for repaying your loans early. Check your loan’s paperwork to see if this applies to you.

    Prioritize Your Loan Payments

    If you have more than one student loan, prioritize your payments. You want to make sure that you are more aggressive in paying the loans with the highest interest rates first because those cost you the most. Using the prepayment strategy outlined above, you can overpay on your high-interest rate loans while making the minimum payment on your low-interest rate loans.

    Once the high-interest rate loans are paid off, you can increase the amount you pay toward your other loans. This way, you spend less money on interest overall and get out of debt quicker.

    Switch Repayment Plans

    Sometimes, it's a struggle just to make your minimum payments, much less pay more than you owe. If this is the case, making any payment will still be better for reducing your long-term debt than making no payment. Look into your different repayment options. You may be eligible for plans that decrease your monthly payments based on your income and family size. Sometimes, these payments can be as little as $0!

    You can also consider consolidating your loans. This option has its pros and cons. When you consolidate, you and your lender look at all the different loans—with their various principals, interest rates, and repayment schedules—and combine them into one new loan, which will have a weighted average of the interest rates of the individual loans. When you consolidate, you often start the repayment schedule over again. So, even if you're 3 years into your 15-year loan repayment schedule, you'd still have 15 more years to go.

    Increasing your repayment period can also often increase the amount you have to repay. However, if the immediate goal is to reduce your monthly payments so you can avoid the consequences of default, then paying more over the lifetime of your loan may be worth it for you.

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