College tuition continues to rise—with recent grads racking up an average of $35,0001 in student-loan debt by commencement day. And while federal loan repayment plans are usually structured to insure the balance is paid off in 10 years, studies show that, on average, bachelor-degree holders actually take 21 years to pay off their loans.2 But you don’t have to settle for that fate. By setting a budget and taking advantage of a few savvy repayment tactics, you could get rid of that debt a whole lot quicker.
1. Consider the 6-Percent Rule
It’s a financial dilemma as old as time: Save, or pay down debt? This is especially concerning for recent grads who likely don't have an emergency fund in place and have student loans to pay off. When it comes to that conundrum, Shannah Compton Game, a certified financial planner and millennial money strategist, offers her clients the 6-percent rule as a guide.
"If you have a student loan that's under 6 percent interest, you're better off just paying that off over time and taking the rest of your money and putting it to work—investing it, growing your emergency fund, doing all of those things that are actually going to get you ahead," she says. But on the other hand, "If you've got student loans over 6 percent, work on paying those puppies off." Focusing on high-interest loans before you double down on other money goals can dramatically shave off how long you’ll be making payments.
2. Focus on One Target at a Time
Whether you get a bonus at work, a stack of Benjamins for your birthday, or just managed to trim some extra money from your monthly budget, try throwing that extra cash towards your student loans. When you go above and beyond the monthly minimum, you’re paying off more of the loan’s principal, which means you’ll pay less over the long run and finish making payments sooner.
Don’t spread your windfall between the loans—you’ll get a bigger boost of motivation if you focus on one loan at a time and see the impact your extra payments are making, says Compton Game. You can either attack the loan with the highest interest first or the one with the smallest balance. "Either method you choose, you're going to win," says Compton Game. "You'll be paying off debt much faster than you would if you're just throwing payments all around the place." Once that loan is paid off, take the amount you’ve been allocating each month and apply it toward another loan.
3. Consider Refinancing
A few percentage points might not sound like a lot, but when it comes to student loan interest rates, it could be the difference between hundreds or even thousands of dollars. If you have a good credit score, some lenders will refinance your loans to a rate as low as 2 percent. "It's so close to zero it's ridiculous," says Compton Game.
Refinancing is often a better approach than, say, using a variable payment plan. That’s because with a variable payment plan, your payments start off small and increase over time. "Right now a variable payment saves you money, but interest rates are not going to stay this low," Compton Game warns. "In a few years, your monthly payment could balloon and you might not be able to handle it.”