A Citizens Bank survey found that 74 percent of Americans with student loan debt wish they had done more to minimize the burden of those loans. The report also shows that many college graduates see this factor as preventing them from buying a house and planning the next phase of their lives.
“The Student Lending Survey clearly shows that many people wish they had more information and knowledge on the subject before making their financial decisions,” said Brendan Coughlin, president and executive vice president of consumer deposits and lending at Citizens Bank, in an October press statement.
For those who have found a way to pay off their debt early, the system can be complicated. Borrowers may find that just having the funds available does not mean the process is as simple as calling up their loan servicer and making a payment.
Here are a few tips for borrowers to ensure their extra student loan payments make a difference.
Try to make interest-only payments when you’re in college. There are some borrowers who manage to keep up with interest payments while they are still in school — avoiding accrued interest and a higher loan balance when they graduate. Making interest payments during school can significantly reduce the amount that needs to be repaid.
First, student loan borrowers need to know exactly where they stand. Since many borrowers have multiple loans, an initial step is to write down all loans and include the balance, the minimum payment required and the interest rate on each loan.
Figure out a repayment strategy after college. The avalanche method is a great way to pay off multiple loans, which means paying off the loan with the highest interest first. Combining the avalanche method with the snowball method is the most efficient way to pay off debt, experts say.
The way the snowball works is that as soon as one loan is paid off, the amount that has been paid on that one rolls into the next loan payment, so a bigger payment is being made on the next loan. It is important to continue to make the same payment — or more — so that the effect will continue until all the loans are paid off.
Determine the highest affordable payment you can make. Borrowers can pay back their student loan debt each month, satisfying both the minimum payment and applying extra funds to pay off the balance.
The best way to find out how much you can add to your minimum monthly payment is by creating a monthly budget. There are several free budgeting apps available online, such as Mint or YNAB, but pencil and paper or a simple spreadsheet will work just fine, too, as long as all the income and expenses are included. Borrowers will need to figure out their own customized budgets.
Check how your payment will be applied. Borrowers need to ensure payments are processed correctly. Student loan payments are set up so that interest and fees are paid first from each monthly payment. Only after those amounts are satisfied for the month will any extra payment go toward reducing the principal balance.
To make sure the extra monies go toward the principal, borrowers should contact their lender and tell them what they are planning to do.
For instance, a borrower may want to communicate with their servicer that the amount sent should be applied to the highest interest loan first. If all the loans have the same interest rate, a borrower might request for the additional funds to be applied to the one with the lowest outstanding principal balance.
If borrowers do not communicate their wishes, lenders will likely spread the additional amount over all the loans evenly. The Consumer Financial Protection Bureau offers a sample letter to help borrowers communicate their plans to lenders.
Make regular student loan payments before or on the due date. It is crucial not to miss the due date, because if missed, borrowers may be hit with late fees.
Send extra funds a few days after you’ve made a payment. The Student Loan Ranger recommends making extra payments one or two days after the regular payment has been made and its receipt has been confirmed. Because the monthly payment has already been made, any extra amount should be applied to the principal balance on the specified loan.
Most lenders offer online access so borrowers can check their payment status. Borrowers should make sure the extra funds are applied to the specific loan number of the account with a “for principal only” notation.
To ensure that there are no errors in the processing of payments, the Student Loan Ranger recommends that borrowers check whether an extra payment has been recorded properly. If it was not, borrowers should contact their lender immediately.
In the long run, paying down the principal balance on a regular basis will ultimately reduce the life of the loan. But it does take vigilance and regular communication to make it happen.