Maybe you’ve been dreading your first student loan payment since the first day of college. Maybe you didn’t think twice about it in all four years. Either way, this should come as good news: there are plenty of ways to save money on student loans.
The sooner you learn the various ways to cut the cost of student loan debt, the more money you can save over time. Find out which of these options work best for you.
How to save money on student loans
1. Make interest payments during the grace period
If you have any subsidized federal loans, you don’t have to worry about interest accruing during the grace period following graduation. Lucky you!
However, if you have unsubsidized federal loans, interest will begin accruing throughout the grace period. Even though you aren’t required to make student loan payments during this period, that interest gets added to your balance and rolled into the principal. This means a costly, unwelcome scenario – paying interest on interest.
In order to prevent your student loan balance from ballooning during the grace period, it’s a good idea to at least make interest payments for those six months. If you don’t know which type of loan you have, contact your student loan servicer.
2. Get on the right federal loan repayment plan
Under the 10-year Standard Repayment Plan, you might end up with the highest monthly payments, but you’ll also pay off your debt faster.
If you opt for an income-driven repayment plan, on the other hand, it’ll take you 20 to 25 years to get rid of that debt. That extra 10 to 15 years of payments means you’ll end up paying more over the life of your loans due to the extra interest. When possible, choose the shortest repayment period possible to save money.
Of course, the last thing you want to do is struggle your way through a 10-year plan that only lands you in default. If you’re having trouble keeping up with your payments, or suspect you will, apply for an income-driven repayment plan.
3. Think twice before consolidating
Borrowers sometimes mistakenly believe that consolidating their loans will help save money On the contrary, consolidation results in a weighted average of your previous loans’ interest rates, plus an extra percentage on top.
Not to mention, consolidation usually ends up putting you on a longer repayment timeline. And if you consolidate your federal loans with a private company, you give up federal protections and benefits you might need later, including income-driven repayment plans, deferment, forbearance, and loan forgiveness.
If you’re looking to save money on student loans, refinancing at a lower interest rate is a far more attractive prospect. The only exception would be if the lower interest rate comes with a longer loan term that ends up costing you more over the life of the loan. And again, federal benefits are forfeited by refinancing with a private lender.
4. Set up automatic payments
Why risk forgetting to make payments when you can have them deducted from your checking account automatically? You’ll save money on late fees. Plus, most loan servicers offer a 0.25% interest rate reduction when you sign up for auto-pay, which could add up to hundreds of dollars in savings over the life of your loans.
5. Treat deferment and forbearance as a last resort
If you’re struggling to make your federal student loan payments, postponing them for a while may sound like sweet relief. What a great way to give yourself some breathing room, increase your income, and start paying on your loans when you’re better positioned to do so.
The problem is interest. All that time you’re not making payments, interest is continuing to accrue on unsubsidized loans in deferment – and on any loan in forbearance. Plus, there is always the chance you won’t be better off financially when the loans come due again, this time with bigger balances even more difficult to pay down.
6. Claim the tax deduction for interest paid on your loans
Each year, you should receive Form 1098-E from your student loan servicer(s), which shows you know how much you paid in interest.
You may be able to deduct up to $2,500 in interest every tax year, which lowers your taxable income and saves you a bit of money at tax time. You can even claim the deduction if someone else made payments on your behalf (like your parents) as long as the loans are in your name.
7. Pay off your student loans early
You’re probably wondering why you would want to make bigger payments than necessary. Hear us out – making more than your minimum payments every month means cutting down your repayment time and saving thousands of dollars in interest.
However, if you decide you want to send in extra payments, consider the following:
- Decide whether you want to focus on your lowest-interest loan first (debt snowball) or your highest-interest loan (debt avalanche).
- Make sure your lender knows how you want your extra payments applied. If you don’t tell them, they’ll decide for you.
- Confirm that your extra payments are being applied correctly.
Don’t rush it, though. There’s nothing wrong with making your minimums for at least a few months to be sure you’re on solid financial footing.
This is the beginning of a long process. It won’t always be easy, but it doesn’t always have to be difficult either. If you choose to be strategic about how you handle student loan payments, you can save a significant amount of money and focus on your other financial goals that much sooner.