You don't need Halloween to remind you that student loans can be scary.
According to Make Lemonade, there are more than 44 million people who collectively owe $1.4 trillion in student loan debt.
The good news is that student loans don't have to frighten you if you embrace these 4 strategies.
1. Refinance your student loans
Student loan refinancing allows you to combine your existing federal and private student loans into a new, single student loan with a lower interest rate.
You can choose a fixed interest rate or variable interest rate, and flexible loan terms ranging from 5-20 years. With student loan refinancing, you will make one monthly payment and have only one student loan servicer.
Since the federal government does not refinance student loans, private lenders manage student loan refinancing.
This means that when you refinance federal student loans you do give up certain benefits such as forbearance and deferral, although some lenders now offer some form of employment protection and other hardship benefits.
You can apply online and learn your new rate in only a few minutes.
To get approved, you typically need to be employed (or have a written job offer), have some work experience, a strong credit score and income, and a history of financial responsibility.
Let's look at an example with this student loan refinancing calculator. Let's assume you have $100,000 of student loans at 7% payable over 10 years, and you can refinance those student loans with a private lender at 3%.
With student loan refinancing, you would lower your student loan monthly payment by $195 and save $23,457 in total.
2. Consolidate your student loans
Another option to help manage student loan repayment is federal student loan consolidation. With federal student loan consolidation, you combine your existing federal student loans into a single Direct Consolidation Loan.
This program is managed by the federal government, and is a tool to help you organize your separate federal loans into a single student loan.
Unlike student loan refinancing, federal student loan consolidation does not lower your interest rate or monthly payment.
With a Direct Consolidation Loan, your resulting interest rate is a weighted average of your existing student loans, rounded up to the nearest 1/8%. Therefore, your student loan interest rate could increase slightly.
The benefit is that you would make one monthly payment and have a single student loan servicer.
Here is a student loan calculator to help you compare student loan refinancing and student loan consolidation.
3. Increase your monthly student loan payment
This strategy may sound counterintuitive, particularly if you are already making large monthly payments.
However, if you can increase your monthly student loan payment by even $100 per month, you can save significantly on interest costs over the long-term.
For example, with this student loan prepayment calculator, let's assume that you have $100,000 of student loans at a 7% interest rate with a standard 10-year repayment term.
If you are not able to make a higher monthly payment (or even if you are and have extra funds), you can make a one-time, lump sum extra payment on your student loans.
Sources for a lump-sum payment may include savings, a bonus, tax refund or inheritance, for example.
Any time that you make an extra student loan payment that is higher than your minimum monthly payment, make sure to instruct your student loan servicer in writing that any extra payments should be applied to the current monthly payment (not a future monthly payment).
Further, if you have credit card debt or a mortgage that has a higher interest rate than your student loan debt, then paying off the higher balance loan may make better financial sense. Likewise, you could also use those funds to contribute to a retirement plan and invest to earn a higher return than the cost of your debt.
That said, let's look at a lump-sum payment example with this lump sum extra payment calculator. Let's assume that you have $100,000 in student loans at a 7% interest rate and a 10-year repayment term.
If you make a one-time, lump sum payment of $5,000, you would save $4,132 on your student loans and pay off your student loans 8 months early.
Summary
Here is a recap:
1. Student loan refinancing = lower your interest rate
2. Federal consolidation = organize your student loans (weighted average interest rate)
3. Higher monthly payment = save interest, repay faster
4. Lump-sum payment = save interest, repay faster
