Saving money on student loans
Updated: Nov 9, 2020
For many student loans are the bain of their existence. Student loan debt is ballooning in America, $1.6 Trillion in 2020! On average borrows who attended a public school has $26,900 in debt and private school attendees have $32,600 in debt. The average loan rate is 5.8% and the average term is 10 years. For the public school attendee that means a total of $35,514.07 paid for your education, assuming you pay $300 per month on your loans. For a private school attendee, you will be paying $360 per month and pay a total of $43,039.36 after interest. Because of this huge amount of debt finding a way to save on whatever portion you may "own" is so important right now.
This is actually quite a bit harder than many other ways to save money, but don't fret I've got a few ideas. Full disclosure, some of these ideas I have not executed on my own. I have done the research and read up on these ideas and in theory, they make sense.
Set up auto-pay
Pay them down while in the grace period (if you can spare the money)
Refinance when the time is right - don't worry I'll help you know when the time is right
Find a co-signer with a better credit rating
Pay the biggest loan down fastest
Funnel extra savings to pay down faster
Set up auto-pay
Most student loan providers will provide a .25% to .50% savings if you set up auto-pay. This requires that you have a bank account, which most of us should have anyway. It is relatively simple, you can log on to your loan providers site and set it up or you can talk with a representative. The value here, about a 10-minute conversation, can save you up to $1,000. From a dollar per hour perspective that is a pretty solid use of time.
Pay them down while in the grace period
The reason most of us have student loans is that we don't make enough money to pay for college. In addition, college is hard and many of us don't have time to get a part-time job and go to school AND graduate with a decent GPA. For those who are fortunate enough to be able to handle work and school at the same time, you have two options. You can either borrow less and use your earnings to pay for school. Or you can use what you earn from your job to pay down some of your loans while still in school. Whatever your situation, if you have the ability to pay down loans while in school it can save you a tremendous amount of money in the long run. In the public vs private example above, if you are able to borrow $5,700 less over the course of your education you will save $7,525.29 over the ten years you are paying your loans back.
Again, that is a substantial amount of money. Invest that over 30 years at a modest 7% rate and it turns into $57,284.43!
Refinance when the time is right
The time to refinance isn't the same for everyone. You will want to ensure your credit score and credit history are in a sound place. That is how you can secure the best possible rate. While credit scores can be very tricky there are a few things that can help. First, pay all your bills on time. Next, get a credit card, use it to pay your monthly recurring bills (gym membership, Netflix, Disney+, etc.) and pay it off on time every month! The credit card combined with paying your student loans off, on time, every month will start to raise your credit score. After a few months or a year, your score should be sitting in a pretty solid place to call a few partners to potentially refinance. The key is building that credit score up and calling around. I've mentioned in the past that a few minutes spent calling around and negotiating can make a huge difference.
Find a co-signer with a better credit score
To piggyback on what we talked about in our refinancing section, if you apply for a loan with a better credit score then you will get a better rate. When a bank is looking at the risk you pose, meaning how likely are you to repay, they will also look at the combined risk between you and your co-signer. If your co-signer has a good credit score then the bank will be more likely to offer a better rate because they are more certain they will get all their money back.
So if you have someone willing to co-sign then go for it. I had my mom co-sign on loans for me in college. It was a huge help and something I really appreciate. In addition to getting a better rate it could also allow you to gain further appreciation for someone that is willing to help you out.
Pay the biggest loan down first
This is a more complex finance topic, but trust me it is important to know if you want to save money. For many, they just want to see one or two of their five loans go away. They think, "hey let me knock out this $2,000 loan first". From a psychological perspective, it can feel really good to eliminate an entire loan. The problem is you are accumulating more interest on the largest of your loans. And while it might feel good to eliminate a single line item, from a pure savings perspective it isn't the best approach. I could certain write out the calculations, but then I'd probably lose some readers and we need you all!
Funnel extra savings to pay down faster
One of the largest contributors to the change in our family's net worth is due to paying down debt whenever we received a bonus from our jobs. While it sucked to see that money go toward something so boring it made sense financially. I'm in a very fortunate situation that my wife and I see eye to eye on eliminating debt and building savings quickly so when we saw some extra money coming our way we planned to apply it to debt in nearly every case. Full disclosure, we would take a small percentage of each bonus and spend it on fun things, but the majority (80%+) would be applied to our largest sources of debt. We have still been able to go on at least a few fun trips in our time together and have splurged on nice things when the time was right so we are still living a fun life. Knocking out debt doesn't mean all fun goes out the window. You just have to smart and judicious about your spending and debt elimination.
Student loans can be a heavy burden to bear. For many, the feeling of those loans can linger for a very long time. Take advantage of ways to save money on those loans and the burden can be greatly reduced. Let me know of other ways you have saved money on student loans and I can always update the article with your ideas (I'd be happy to give you credit if you'd like me to as well). Just imagine if you combine these savings tips with these, these, and these, you could be saving money and building up hundreds of thousands of dollars in your 401(k)!