The 8 Best Ways To Pay Off Student Loan Debt

Student loan debt is a huge financial burden for many Americans. According to the Federal Reserve, almost one-third of American students have to take student loans to attend college. Credit data company Experian reports that in 2020 the average student loan debt was more than $38,000. 

Conventional wisdom says the quickest way to pay off your student loans is to pay down smaller loans as quickly as possible and use income-driven repayment plans for larger loans. Recent research indicates the best strategy may be to combine these methods by paying down loans quickly at first and then signing up for an income-driven repayment plan. 

If you don’t qualify for an income-driven plan, there are still many strategies you can use to pay off your student loans as quickly as possible. This article explores each strategy, so you can decide what’s right for your situation.

The Single Best Way To Pay Off Student Loans… Maybe

Student loan debt experts have traditionally given the following advice for paying off student loans the quickest: 

• If your student loan balance is small, pay off your student loans as quickly as possible.  

• If your student loan balance is large, sign up for an income-driven plan to pay off your loan

Recent research shows that the best strategy to pay off student loans is to combine these two methods. That is, according to the researchers, you should pay down your student loans as quickly as possible in the early years, and then sign up for an income-driven repayment plan. 

Standard Repayment Plan vs. Income-Driven Repayment Plans

To understand the most recent guidance on repaying student loans, it helps to first understand how repayment plans work. Borrowers are automatically placed on a Standard Repayment Plan (SRP). This gives you 10 years to pay off your loan(s) at a fixed interest rate. Because 10 years is a relatively short repayment term, your monthly payment will be higher on the SRP than on most other repayment plans. 

If your monthly payment is too tight, you can apply for an income-driven repayment plan, which ties your monthly payment to how much you make. With an income-driven repayment plan, you make payments over a longer period of time, usually 20-25 years. After paying for 20 years for undergraduate student loans and 25 years for graduate student loans, you’ll qualify to have the remaining balance of your student loans forgiven. This means after you’ve made all your payments, you’re not responsible for paying any more on your loan, no matter how much you still owe. 

While having the remaining balance forgiven is a good thing, one downside is that the IRS will tax what you still owe as ordinary income. Because of this tax liability on the amount forgiven, sometimes you end up paying more with an income-driven plan than with an SRP. 

When should you switch from the SRP to an Income-Driven Repayment plan?

Although income-driven repayment plans allow borrowers to reduce their monthly loan payments and then benefit from student loan forgiveness, they may also increase the overall cost of the loan. The loan can be costly if you’re left with a large tax liability on the amount forgiven after your repayment term is over. 

This is why researchers say you should try to find the “critical horizon” or the perfect timing financially to switch over from the standard plan to an income-driven plan. The goal, according to the researchers, is to pay the least amount of compound interest possible while getting the most out of your student loan forgiveness terms. Compound interest happens when unpaid interest is added to the principal amount of a loan, and you end up paying interest on the interest charged by the lender. 

Other Things To Consider...

Note that income-driven repayment plans are only available for federal student loans, not private student loans. This means that this strategy isn’t available if you have private loans. Also, the researcher’s “critical horizon” strategy doesn’t include student loan refinancing. It only applies to income-driven repayment plans. Refinancing may be a better strategy because you may be able to pay off your loans faster than with an income-driven plan. 

Finally, note that the income-driven payment plan you choose will depend on your personal financial situation.  

Other Proven Ways To Pay Off Student Loan Debt Faster

The above method may not work for everyone. Some student loan borrowers don’t qualify for income-driven repayment plans. For example, Parent PLUS loans are only eligible for income-driven repayment plans if they’re consolidated with other federal student loans. Also as noted, if you have private loans, you’ll need to use a different strategy to pay down your debt. Regardless of the type of loan you have, can always try the following general strategies for paying down your loan as quickly as possible. 

Pay More Than the Monthly Minimum Payment

Lenders can’t penalize you for prepaying your student loan or paying more than the monthly minimum. Paying more than your minimum monthly payment can dramatically reduce the time it takes you to pay off your loan. For example, under the Standard Repayment Plan for a $25,000 loan with 6.8% interest, your monthly payments over the 10-year period would be $288. You’ll pay $9,272 in interest. But if you round up your payment to $300 per month, you’ll pay your loan off six months faster, and you’ll end up saving $372 in interest. If you can pay $325 each month, you’ll pay your loan off 18 months faster and save $1,447 in interest.

If you pay more than the monthly minimum payment, instruct the student loan servicer to apply the extra payments to the principal balance and not to next month's scheduled payment.  

If Your Lender Offers It, Enroll in Autopay

Enrolling in autopay typically lowers your student loan interest rate. Borrowers with federal student loans get a .25% interest rate discount when they enroll in automatic payments. Many private lenders also offer interest rate discounts for signing up for autopay. Although the discounts are small, they do lower your loan cost over time. And signing up for autopay ensures you never have a late or missed payment.

Set Up Bi-Weekly Payments

Pay down your student loan (or any debt) faster by making half of the minimum monthly payment amount every two weeks instead of a monthly full payment. Over a year, this means you’ll make 26 half-payments (or 13 full payments), which amounts to one additional payment. This saves you money over the life of the loan.

Consider Refinancing if You Have a Steady Job and Good Credit

Refinancing can help you pay off your loan faster without making extra payments. If your credit score is good, you may qualify for a lower interest rate and lower monthly payments. This could help if you decide to pay more than the monthly minimum. 

You could also refinance for a shorter loan repayment term. Although your monthly payments will be higher, you’ll pay off the loan quicker and save a lot in accrued interest over the life of the loan. Contact your loan servicer for repayment options under a refinancing plan.

Avoid Interest Capitalization

lnterest capitalization occurs when unpaid interest is added to the principal amount of a loan and the lender then charges interest on the increased balance. This means you end up paying interest on the interest charged by the lender. This is called compound interest. When you’re investing your own money, you want to have compound interest to grow wealth. But when the lender is getting compound interest off your loan, you’re losing money.  

Interest capitalization can cause loans to become very expensive very quickly. It’s the reason loan balances never seem to go down for some borrowers. For private student loans, interest accrues while you’re still in school, during the repayment grace period. Some private lenders also offer deferment or forbearance periods. During the grace period or deferment or forbearance period, the interest is added to the principal loan balances when repayment begins, which means you then pay interest on a larger balance.

To avoid capitalization, try to make monthly interest payments while the interest is accruing. You could also make a lump-sum interest payment before the grace period or deferment or forbearance period ends. At a minimum, this will prevent the loan balance from growing and may shorten the payoff time.   

Start a Side Hustle

A good strategy for paying down your loan faster is to increase your income or reduce your costs. Side hustles have become very popular and are a good way to pay down debt quickly. Sign up for freelance gigs, or make extra money working for a ride-sharing company.

You could also sell some possessions to pay down your student loan debt more quickly. Sell items like clothing or jewelry. Rent out a room in your home or rent your vehicle. If you’re living by yourself, consider getting a roommate to cut down on rent costs. Younger single borrowers may decide to move back in with their parents for a while to save money.

If you’ve come into a windfall through a tax refund or a raise at work, use any extra income to pay down your student loan balance. Also, some employers will pay off student loans as an employee benefit. If yours does, take advantage of it!

Stay With the Standard Repayment Plan

For all federal student loans, unless borrowers choose a different payment option, borrowers are placed on a 10-year Standard Repayment Plan (SRP). As noted, with the SRP, you make monthly payments at a fixed interest rate for 10 years. The interest rate is usually lower than other options, but if you have excellent credit you may be able to get a lower rate with a private lender.

If you can't make extra payments on your loan, the fastest way to pay off your loan is to stay with the SRP.

As noted, if you have a federal student loan, you can also sign up for one of four income-driven repayment plans. The income-driven plans extend the payoff timeline to 20 years for undergraduate loans and 25 years for graduate loans. 

You may also want to look into student loan consolidation under the Federal Student Loan Consolidation program. Only federal loans are eligible for consolidation. Consolidating your federal student loans combine them into one loan with one monthly payment at a fixed interest rate. The fixed interest rate is the weighted average of all the loans being consolidated. Student loan consolidation lengthens your repayment time to a maximum of 30 years, depending on how much debt you owe.

If you can afford to stick with the SRP, this is usually a faster way to pay off your loans than using income-driven repayment plans or loan consolidation.  

There’s No One-Size-Fits-All Student Loan Repayment Plan

Remember, when it comes to student loan payments, your best strategy depends on your personal financial situation. What works for someone else may not work as well for you. 

When thinking about your strategy for paying off student loans, consider your financial goals and situation. Short-term goals and priorities may include things such as paying your bills every month and paying off high-interest credit cards. Long-term goals may include making a down payment on a home, funding your children’s college, or retiring. You may be trying to decide whether it’s best for you to use your money to invest or pay off your debt. There are plenty of student loan payoff calculators online to help you plan according to your situation. 

Let’s Summarize...

Paying off your student loans as quickly as possible is a smart financial move that can also ease your financial stress. If you qualify for income-driven repayment plans, the best strategy may be to pay down your loans quickly during the early years under the Standard Repayment Plan and then sign up for an income-driven repayment plan later. You need to figure out the best time to sign up for an income-driven plan. When your loan is later forgiven, your tax liability on the forgiven amount could make the loan more expensive than if you had stayed with the SRP. Some borrowers aren’t eligible for income-driven plans and can’t use this strategy.

Regardless of what type of loan you have, and whether you’re eligible for income-driven repayment plans, you have lots of options to pay down your student loans quickly. Consider increasing your income by taking on a side job, selling things, or renting out a room in your home. You can also cut your expenses by getting a roommate if you live alone or move back in with your parents while you pay down your debt. Finally, consider refinancing to a lower interest rate or consolidating your federal student loans.

No matter what happens, keep paying down your loans. Defaulting on a student loan can have severe financial consequences.