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College is both exciting and nerve-wracking time as this is a big turning point in one’s life. However, coming out of college can be overwhelming due to, beyond everything else, the student loans. This is a big transition and then to have loans thrown on top, can be a huge weight on your shoulders. But there are several strategies that can be used to save money on student loans. Many vendors provide a 6-month buffer before requiring monthly payments, so that takes a little stress off. Nevertheless, creating a budget and sticking to it is a big factor but there are a few other ways that help as well to save money on student loans!
If you listen to Dave Ramsey, then you may find some of this familiar. I tend to fall closely in line with that train of thought. I have used some of these strategies to decrease our loans over the past 5-10 years.
Before College or graduation
1. Don’t take out as much for loans
This is a little pre-thought rather than after college but try to take out fewer loans. Is it possible to save or put money aside ahead of time? If so, this should be a goal as it will save you a lot in the long run. Even a minimal amount of a couple thousand will save you a bit of money off of the interest that it will incur over the life of the loan. The other is to have a part-time job while in school to put towards the loan or to reduce how much of a loan that you are taking out.
2. Do I need a degree or trade?
This one takes a lot of thought beforehand. College degrees have become almost a gold standard after high school, but should it be? Many people that go to a trade school will make more money later on than those with college degrees. If you do opt for a college degree, have a thought of how much it benefits you in the future. If its something you have a passion for, never question that. You still want to be happy with your decisions, but it does come down to serious thought beforehand. This is a simple way to determine how to save money on student loans before you even start!
After graduation
3. Refinance the loans
This is the simplest way to save a little money over the course of the loans. This is less likely to make a difference initially but will be a savings through the years of paying the loans off. The interest rates that students are offered when in school can be astronomic. I have seen student loan interest rates up to almost 13% but doesn’t have to be. You can refinance your loans through several vendors for a much lower interest rate. Look for highly rated companies. One stipulation may be that it will only refinance up to a certain amount such as $50,000. So be mindful of this.
4. Make more than the monthly payment towards principle
This will come down to if your budget allows but if you can, always pay more. When I first graduated, we lived off bare minimum and couponed like crazy. At that time, we were able to pay almost double the monthly payments because we didn’t want that much debt over the long term. Paying more decreases the accumulated interest over the course of the entire loan.
5. Similarly, make biweekly payments
If you don’t want to put that much down with each payment such as $1000 per month rather you could biweekly payments. What this means is doing $500 twice a month or each paycheck. This puts more towards the overall principle. How this works out is that you are actually making 26 smaller payments or 13 full payments instead of 12 payments if you were to do monthly. It becomes a subconscious way of paying more towards your bills without realizing it. If your lender allows this to be set up, then I would say think about taking advantage of it.
6. Don’t strive for loan forgiveness.
Don’t get me wrong, this may have to happen in some cases due to income. However, this should not be the goal. Realistically, if you are making above 70k a year, there should be little to no reason not to try to pay this off. If there are children involved, this does alter goals slightly but should be avoided if possible. Even if you are struggling to pay your loans because, in this day and age, it can be difficult without locking in your budget. There is also no guarantee for programs such as PSLF (public service loan forgiveness) of actually getting loans forgiven.
In past years, it has been greater than 80,000 applicants. Of those less than 900 got their loans forgiven. The actual number is actually less than 1 percent of applicants. So it is difficult to say this is something that you should strive for. You can apply and hopefully are lucky but don’t rely on this as part of your strategy.
Depending on the program, One thing to remember is that loan forgiveness is taxable income. If you end with $20,000 of student loan debt, you get taxed on that $20k as income. This can drastically affect your taxes and you will likely have quite a bit to pay in.
If you are able to pay off the student loans, then you should. The goal should always be to become debt-free or as close as possible. This type of mindset to have loan forgiveness as a goal is the complete opposite. I always recommend checking with a financial adviser for big changes like this. However, if you find one that says that you should pay as little as possible and work towards loan forgiveness, RUN!! They don’t know what they are talking about and you need to find someone new as they are not looking out for you.
7. Interest capitalization is your enemy
This is something that is important to understand when getting the loans and why your loans seem like it’s not going down. So what is this? When you defer your loans for any reason, the loan still accumulates interest. The interest is then added onto the total loan total, which then accumulates more interest. Basically, you are paying interest on the interest. Let’s say your loan is 5000 and you accumulate $50 in interest from deferment. That $50 is capitalized on and added to the initial $5000. The new balance is now $5050 and the interest is off of the entire balance. This is different than paying interest only on the principal balance of the loan. This is a completely hypothetical situation but demonstrates the interest capitalization.
8. Check for discounts
Discounts may be available through your lender if you meet certain criteria. This could be as simple as switching to paperless billing. You won’t get money off of your loan, but it can decrease the interest rate on the loans. Even if its 0.25% off of the loan interest rate, this can be substantial over the course of the loan. When looking at even a $10,000 loan, 0.25% could save you 300 of extra interest over the course of the year. Make note that this is a stagnant example and savings will vary but shows that you can save money.
9. Claim it on your taxes
Make sure that you keep your paperwork for that stressful time of year. Each lender for student loans will send out a 1098E – this form shows how much you have paid in interest rate over the course of the year. You may be able to get some money back for this on your taxes. With this deduction, you can claim up to $2500 per year. You can put all of your interest in but the most you can get, even if you paid more, is $2500 per calendar year. This is by far my favorite way to save money on student loans!
10. Pay more towards your high-interest loans
This is where I tend to differ from Dave Ramsey. I recommend paying off higher student loans first then work towards the smaller loans. The reasoning behind this is to keep the interest rate as low as possible. If all your loans are around the same interest rate, then I would change to the Debt Snowball that Dave Ramsey suggests. Whichever method helps to make a sizeable difference in the loans over time. Saving money on student loans is difficult but keeping the interest to a minimum makes a difference.
11. Income-based repayment, not necessarily your friend
Starting out after college is difficult between student loans, finding a place to live and basically getting established. When you first start out, it is not a bad idea to do income-based repayment as this will ease up a little burden. However, this is not a great option for the long term. Why I say this is because it prolongs the life of the loan. You will easily add several years to the end of the loan with this method, which means more interest that you will need to pay. Again, don’t rely on the idea of loan forgiveness. Once you are established, you should look at putting more money towards your loans to pay off sooner.
12. Start a side hustle or second job
Start that hustle! This can be anything from delivering pizza, Uber to odd jobs. Sometimes even things as simple as blogging can make extra income. The difficulty here is that something like that takes a long time and the earnings are usually minimal. In our case, we make little to no money off this website, besides enough to keep it up and going. I enjoy doing this and that’s why we have kept with it. For the side hustle, it’s best to do something that is guaranteed money for the work such as Uber or lyft.
13. know that an end is in sight
There is an end to student loans but it can take a long time. The time frame is up to you and your financial standings. If possible try to pay more now to save money later on. The longer these are held, the more overwhelming the loans become. Makes sure to keep track of your budget on what you can afford. Everyone’s situation is different and one strategy won’t work universally. However, find one that works for you and run with it. It can save money on student loans in a big way over the years.
Hopefully, you have some of these helpful. Many of these strategies, we have used to reduce our student loans considerably. Have you tried any of these strategies? Disagree with any of them? Let us know in the comments!