How to Pay Off Student Loans in 5 Years
Student loans can be debilitating to your monthly budget. You can spend wisely, have an above-average income, and still feel like you’re only digging a deeper hole when it comes to student loans. In this post, we’ll show you how you can pay off your student loans in 5 years. It’s important to note that every situation is different. The balances of your student loans, your income, and your interest rates all matter.
Determine the amount of your student loans
Before you can begin strategizing how you will pay off your student loans, you need to understand how much you have withstanding. Go through each of your student loans and determine their balances. Once completed, fill in the total amount you owe.
Determine the interest rates of your student loans
After figuring out the balance of each student loan, you’ll want to find the interest rate on each individually. It would be wise to create a spreadsheet with each loan, its balance, and its interest rate.
Determine “high priority” loans
You’ll then need to determine which loans are your highest priority. These have the highest interest rates and highest balances. By paying these off first, you’ll lower your overall interest paid and you will be able to pay off your total student loan balance quicker.
Have a student loan with an interest rate above 7%? Depending on your credit score, income, and balances, you might be able to refinance your loans into one loan with a lower interest rate and ultimately, a lower monthly payment. This will allow you to pay extra towards your principal balance, lowering what you owe, faster.
Steps to paying off your student loans in 5 years
Like we mentioned earlier, the steps needed to pay off your student loans in 5 years will vary based on a multitude of factors. In this guide, we’ll use separate scenarios to help you based on your individual situation.
Year 1: Budget
The first year of paying off your student loans is vital to your success for the years to come. Just as it’s important to get a good start in an athletic event or competition, your student loan debt is no different. Your goal in year one is to have a budget that allows you to pay extra on your student loans each month.
Establish a budget
During the first year of your journey, you need to establish a budget. To do this, you need to create a sheet that contains all of your income sources and all of your monthly expenses. It’s a good idea to start with fixed expenses (expenses that will not change, like your housing payment, utilities, or a car loan, if applicable). Then move on to adding up all of your monthly variable expenses (these can and will change from month to month, think of entertainment or groceries). When creating a budget, your goal is to make your variable cost expenses, fixed. This way you can better control your spending. The next step of your budget is to estimate how much you can spend on your variable cost expenses. Remember, you choose this amount. For example, you could budget $100 per month for entertainment, or you could budget $50. It’s up to you. Once you have budgeted your variable expenses, subtract your income from all of your expenses. You should be left with $0. If you have more than $0, it’s time to allocate that money somewhere else, like your student loan debt. If you have a negative balance after subtracting your expenses, it’s time to cut costs (preferably unnecessary ones like entertainment or clothing).
Year 2: Increase Income
Now that you have a budget established and are paying extra on your student loans, we need to expedite the process. How? Depending on your balances, it might be time to pick up a second part-time job. The money you make from this gig or job should go directly to your student loans and nothing else. It’s important not to adjust your style of living just because you have more money each month, it’s only used for student loans. Looking to start a side hustle? Read our article here on how to start a side hustle or you can read here to learn how to make money online.
Not ready to start a second job just yet? This might be the time to looking for a new job with better pay or ask for a raise at your current job. Year two is all about increasing your income and using that income to pay even more on your student loans.
Year 3: Refinance
In year three you should be starting to make substantial progress on your overall balances. What’s next? It might be time to refinance. Assuming that your credit is in good standing (and it should be if you’ve been following the budget you created in your first year), you should qualify to refinance your student loans. A better credit score and lower balances will help you to get a lower interest rate, which will allow you to pay even more towards your principal balance. Similar to how your increase in income is only to go toward your student loans, you should not adjust your payment on your student loans even though your payment has gone down. For example, if your previous payment before refinancing was $900 per month, and you were able to refinance and make your payment $725, you should still be paying AT LEAST $900 per month (it should be more if you’ve been following our steps). If you could afford it before, you can afford it now.
There are many different places you can go to refinance your student loans. We recommend shopping around for the best rates. Remember not to agree to a hard inquiry until you are ready to commit, as it will hurt your credit score. If you’re looking for a reputable place to refinance, try Credible. They’ve been around for some time now and specialize in student loan refinancing.
Year 4: Wait
In your fourth year, you should continue paying down your balances. You should notice that they are decreasing exponentially as you increase your payments towards the principal balance. This year might be the hardest for many. It’s all about staying motivated and disciplined. Think of the relief you’ll have when your loans are paid off!
Year 5: Adjust
As your time is coming to a close, this is your chance to make any last-minute adjustments to your strategy. Maybe you still have somewhat high balances, this would be a good opportunity to tweak your budget so that you can allocate even more towards your student loans. Hopefully, by the end of this year, you will have your balances at, or close to $0.
By following these steps, you can pay off your student loans in no time. Sticking to your budget, increasing your income, and refinancing to better interest rates are the keys to helping you get out of debt fast. To help you, we’ve gathered more tips to help you below!
Tips to help you pay off your student loans
Lower your housing costs
When paying off student debt, the more you can allocate to it, the faster you’ll be able to bring your balance to $0. One of the best ways to do this is by lowering your housing costs. For many, this is their largest monthly expense. By lowering these costs, even slightly, you’ll be able to pay down your student debt faster.
Cut the cable
Saving a few extra bucks is the name of the game when it comes to paying off student debt. By cutting your cable expense, you’ll be able to increase your student loan payments. And let’s be honest, watching the season finale of Grey’s Anatomy isn’t going to get you as fas as paying off your student loans will.
Get rid of your car payment
When trying to pay off your student loans, they should be your priority. A new car certainly shouldn’t be. If you’ve purchased a newer car, it would be wise to sell your vehicle and put 15% of that money towards an older used car and the other 85% towards your student debt.
Have you successfully paid off your student loans? We’d like to hear your best tips on how you got it done! Share below!
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