Landing your first job out of college is a great milestone, but it can quickly become overshadowed by student loan payments. New graduates may find themselves overwhelmed with student loans, especially if their loan balance is higher than their salary. One way to get your student debt under control is by paying extra on student loans, even if you’re on a tight budget. Here’s why making extra payments is so important, and what you can do to find the money to pay off a student loan early.
Why you should be making extra payments on student loans
When you work full-time, you may feel exhausted. The last thing you may want to do is take on a second job or constantly worry about cutting costs. But if you can find the motivation, finding a way to contribute a little more money each month can pay off in a big way.
Here are four reasons why you should put an extra $100 toward your student loans each month.
Here’s an example: A recent college graduate has $35,000 in student loans at a 6.80% interest rate and minimum monthly payment of $403. If the graduate pays only the minimum, it would take 10 years to pay off the loans. In addition, the borrower would pay $13,334 in interest on top of the original loan balance.
However, if the borrower boosted their monthly payment to $500 per month, the overall interest charges would be reduced by $3,613. That money could be saved for retirement, put toward a down payment on a house or used to take a vacation.
So how much could you save by paying an extra $100 a month on your student loans? Use the loan repayment calculator below, factoring in extra payments.
For federal student loans, borrowers are automatically enrolled in a Standard Repayment Plan of 10 years. A decade is a long time to make loan payments, and you’ll likely want to get that financial burden out of your life sooner than later.
Putting an extra $100 a month toward your debt does more than save you money in interest. In the example above, where the borrower bumped up payments to $500 per month, the loan would be paid off two and a half years ahead of schedule. Making an extra payment will get rid of loans faster, freeing up your mind (and money) to focus on more important things.
Be aware, however, that paying off your student loans can cause a slight decrease to your credit score. This is because paying off student loans can result in less diversity in the types of debt in your “credit mix.” In terms of a credit rating, a larger “mix” shows that you are able to manage different types of debt, which translates to a slightly higher credit rating.
If you’re debt-free, that means you can boost your savings more quickly. Once you pay off your student loans, you can dedicate more money to your savings account.
If you put that $500 into the bank each month when your loans are gone, you will save $12,000 in two years. If you invest the same amount of money in a 401(k) or IRA with an annual return of 6%, you’ll earn $716 on your investment over two years.
Interested in owning your own home? When mortgage lenders review your application for a loan, they look at your debt-to-income (DTI) ratio.
This is a number that shows how much debt you have relative to your salary. The lower the ratio, the better. Your lender wants to know that you can comfortably afford your mortgage payments along with your other monthly obligations.
Your student loans can hurt your DTI ratio. If you have a large student loan balance, your monthly bill can eat up a significant part of your salary, making it more difficult to get a mortgage. Putting more cash toward your student loans now will help reduce your DTI ratio later on, improving your chances of getting a mortgage for the home you love.
Finding more money to pay off your debt faster
It’s clear that extra payments are important, but scraping together the extra cash can be difficult. While plenty of people will tell you to track your spending to “find” more money, that advice doesn’t always work. If you’re already strapped for cash, you likely aren’t blowing money on Starbucks, fancy dinners out, avocado toast or shopping sprees.
Aside from cutting expenses, another option is to try to boost your income to pay down student debt. A good way to do this is by taking on side hustles, which come in many forms. You can clean houses, run people’s errands or pet sit.
Your side income may vary wildly each month at first, but it should be enough to at least pay an extra $100 toward your student loan debt each month. While an extra $100 payment a month may not seem like a lot, it adds up quickly. Working a little bit each month can give you the money you need to pay off your student loan debt more quickly, which could save thousands of dollars and open up other financial opportunities.
Marty Minchin contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.99% – 5.64%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.09%3||Undergrad & Graduate|
|1.89% – 6.77%4||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|1.99% – 5.41%5||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.