I aggressively paid down my student loans for 3 years. My goal was to reduce my debt and decrease the total amount of interest I was paying over the life of the loan. These are the things I did to actively manage my student loans.
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1. Proactively go into your student loan account
If I had simply called in every month to pay my bill or set up auto pay, I would have never realized that the default payment schedule for my loan was only covering the interest. Since I was on a Graduated Repayment Plan, 100% of my minimum payments were going towards interest for the first two years. I strongly recommend you take an active role in managing your student loan debt. Otherwise, you may miss out on opportunities to save money and pay the balance of sooner.
I also try not to just look at my student loans as a lump sum that I am paying off. Just because I have multiple student loans that I pay through my student loan servicer doesn’t mean all of those loans have the same terms. I had different loans with different rates each semester. It could be easy for me to simply look at this as one loan and make the payment each month but I closely evaluate each loan and how I can effectively pay it down. Develop an understanding of what the total amount owed is for each loan you have, whether it is subsidized or unsubsidized, and what the interest rate is for each loan.
2. Pay more than the mandatory amount
Once I realized how my funds were being applied, I knew how much I needed to contribute for my payments to go directly to the principle. If you are in a position to pay more than the minimum amount, increase your monthly payments. These excess payments will go directly to principle. You’d be surprised how much it reduces the amount you pay overall on the loan. I have shaved off THOUSANDS of dollars of interest on my student loans by making calculated excess payments. No matter where you are in your financial journey, paying off debt will always improve your net worth!
I paid more than the minimum amount in two different ways:
- Multiple Payments: I would make more than one payment a month. After I calculated how much interest I was paying per day on my loans (student loans typically compound daily), I realized how much I needed to pay for my excess payments to only to go to principal. If I knew that I would have more money later in the month, I would use that money to make an additional monthly payment.
- Large Lump Sum Payments: I would pay large amounts while making my monthly payments. The nice thing about this is you are able to make huge progress at one time. It is a tribute to Dave Ramsey’s Debt Snowball. It is extremely motivating to make significant progress and see the amount you owe go down in large increments.
3. Review your excess payment preferences
Excess student loan payments should be set up based on your personal goals. There are two ways you can set it up:
- Default Allocation: This is the default way that your service provider will allocate your excess payment. It is typically based on any recently accrued interest and then the rest is applied to the loan with the highest interest rate. If you want a hands off approach this may be a better option for you. For example, if you are killing it and paying off a bunch of loans, your service provider will make the necessary adjustments to your allocation. If you have a custom allocation, this would need to be manually changed based on your preferences.
- Custom Allocation: A custom allocation is where you designate where your money goes after you have paid mandatory principal and interest. Your custom allocation is broken out by percentage that should go to each loan. I created a custom allocation because my personal goal was to tackle the largest loans first. Since most of my loans had the same interest rate, my excess payments were spread out very thinly. I wasn’t able to see much progress until I changed my allocations to custom. Seeing these balances go down in such large chunks really motivated me to keep going. My priority with my custom allocation was to focus on paying down the principal and reduce my monthly interest payments.
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4. Pay consistently
I paid my loans consistently every month. Since I was paying excess amounts from the beginning, I was always ahead on my payments. In my account, I could see when my next payment was due based on my excess payments. It got to the point where I was over 2 years ahead on my payments!! I continued to pay the same day of each month. If you are ahead on your payments, they will most likely tell you that no payment is due and question if would like to proceed with your payment. Do NOT let this deter you. Being consistent allowed me to see the progress that I was making towards my interest payments.
Seeing how ahead I was on my payments was just further encouragement to get ahead. Although I never intended to use it, it gave me peace of mind knowing that if something happened to my income, I was so far ahead with my payments that I would still be in good standing if I had to decrease my monthly payments.
5. Continue to pay while in school
A few years out of school, I started to take some additional classes that put me in a part-time status with my student loans. During this time, I was not required to make payments and interest accrual was paused on my subsidized loans. I used this time to pay more money towards the loans that I did not have to pay interest on and continued to make consistent payments.
Something that has been interesting to see over the life of my loan is when my payments were “reset”. For example, when my loans went into deferment because I started taking additional classes. Once I was out of school and no longer in a deferment status my loans were restructured based on my new graduation date. It was like starting over.
I received a new minimum payment and all of that time I was paid ahead was gone. This was the case even though I continued to pay my loans while in school and I didn’t take out any additional loans while in school. My excess payments were factored into my new minimum payment and my minimum payment amount went DOWN. I continued to make the same payment amounts as before but I thought it was an interesting note to share. Would you rather have 2 years banked on being paid ahead on your loans or have your minimum payment slashed by 50%? I’d be interested to hear your thoughts!
Use these steps to automate your process
Once my loans became more manageable, I was able to shift my priorities to other parts of my finances. Check out my post on why I haven’t paid off my student loans even though I can. Taking an active role in managing your student loans will empower you to make well informed decisions regarding your financial future.
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Changes coming for federal student loans
In case you haven’t heard, the Department of Education has signed contracts with new student loan providers for all federal student loans. You should be notified of who your new provider will be. Keep good records of your payments in the case that something does not transfer over correctly. These changes were originally planned to take effect at the beginning of 2021 but have been delayed. Stay up to date on changes and how it will impact you.
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
