How to Slash Student Loan Interest by Over 50%

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Student loan interest. The gift that keeps on giving.

Everyone knows the story about student loan debt in America.  It’s a trillion dollar industry that is burdening graduates and sucking life out of the economy.  It’s a combination of skyrocketing tuition costs, easily available loans and lots of ignorance that makes it all possible.  Most of us have been affected by student loan debt and almost everyone knows someone who has had to carry the burden.  I’m not one of those people that wants all student loans to be forgiven and be on my merry way.  There is a cost to higher education and the student should bear some of that cost, but it is rising way too fast and destroying lives in the process.

The government does try to help here and there with forgiveness programs and interest rate “freezes”, but like so many issues nowadays, student loan debt is a problem that the government has allowed to flourish and it is now trying to clean up after the fact.  That means it is the responsibility of the borrower to find a way to get rid of the debt and get rid of it fast.

With tax filing season upon us, students are receiving their 1098-E tax forms which state how much interest they paid to their lender.  Interest is what the banks love, because it costs them nothing and costs the borrower everything.  It’s like a nice bonus thank you check to the lender that you pay month after month for years on end.  It doesn’t go towards paying down principal, which is what you need to do to become debt free.

When I got my forms this year, I was pleasantly surprised to find that in 2014, I paid less than half the interest which I paid in 2013.  You usually do pay less interest as time goes on since the principal is going down as well, but I didn’t expect a 57.4% decrease in interest paid.  What did I do so different in 2014?

Did I consolidate all my student loan debt into one easy to remember payment?  I did look into this but consolidating would have actually increased my monthly payment along with my interest rate.  No thanks.  I make payments to three different lenders but it’s all done automatically so it’s no big deal.

Did I qualify for a government program?  I make too much money (which I guess is a good thing) and don’t live in areas that would qualify me for government assistance.  So no government help for me.

Did I decide to sign up for the other federal options like income based repayment?  No because signing up for any of these delayed payment programs would only increase my length of indebtedness and total interest payments.

The only thing I did differently in 2014 was that I decided to pay off my debt even faster.  I did this by simply looking at my budget and figuring out how much extra I could afford to put towards my student loan payments each month.  At the time it was $400 extra, so I simply applied that as an extra payment to my loan with the the highest interest rate and went on with my life.

No crazy forms to fill out and no praying that Congress would magically forgive my loans.  Just attack the loan with the highest interest rate month after month.  This is the most efficient method to get out of debt there is.  The name of the game is to get out of debt as quickly as possible with the lowest amount of interest paid, and the Avalanche Method is the quickest way to get it done.

So if you find yourself paying a lot in interest every year, find out how much extra you can afford for debt repayment and attack that highest interest rate balance.  Better yet, cut out unnecessary spending and just funnel that money into debt repayment.  That is the best way to decrease your interest payments and quickly increase your net worth.

Note:  Student loan lenders want all of your money, so some of them will apply extra payments towards interest rather than principal.  Make it clear to your lender by phone or email that any extra payments should be applied to principal only.  You can also time your extra payment to be applied on the due date of your minimum payment, which will cause it to be applied towards principal.    

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Comments

  1. Great idea! I have EXTENSIVE student loans as well and am trying to pay them off as quickly as possible. I will have to check when they finally have all the tax forms up if those extra payments amount to a bigger interest saving for me as well this year. My favorite (not) part of tax time is that they don’t give you credit for all that extra interest paid if you make too much money. So not paying extra interest is definitely the better way to go! Thanks!

    • Yeah it’s a shame the maximum tax deduction is for student loan interest is $2,500, when many people, myself included, are paying much more than that. Maybe they will increase it one can hope. Glad the post helped.

  2. Pretty simple, isn’t it. Personal responsibility trumps anything else you can do when it comes to debt.

  3. Wow that is a huge reduction in interest just by making extra payments! I am focusing on trying to pay down my largest loan right now and always make 1-2 extra payments each month. I have noticed a nice reduction in the interest rates, even with one of those student loan servicers who likes to make it hard to pay directly to principal.

    • Yeah it is pretty annoying that they make it so hard to direct the payments where you want. It is in the banks best interest (no pun intended) to keep you paying as long as possible.

  4. Christian Go says

    Great Article. Thanks for the info, super helpful. Does anyone know where I can find a blank “Form 1098-E” to fill out?

  5. Nice post. I learn something new and challenging on sites I stumbleupon everyday.
    It will always be helpful to read through content from other authors and practice a little
    something from their websites.

  6. This part of your post: “You can also time your extra payment to be applied on the due date of your minimum payment, which will cause it to be applied towards principal. ”

    …is incorrect! I just did an extra payment of 2K last month on the same day as my minimum, and they applied all but $25 towards the interest. Not looking forward to trying to get FedLoan on the phone! Just wanted you to know.

    • Interesting. I’ve dealt with a number of student loan companies and they all usually apply it towards principal if you do the extra payment on the same day as the minimum payment. Unless the minimum payment date is on a weekend or holiday, then all bets are off! Not sure if this was the case with you. These companies are sneaky and will do underhanded tactics like this to get more of our money. Thanks for the info.

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