How to pay off your student debt faster. ‘Even an extra $5 a month can make a big difference,’ expert says

Personal finance

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Over the last three years, while student loan payments were on pause, many borrowers probably thought, “I could get used to this.”

Fortunately, you may be able to finish paying off your student debt sooner than you thought, experts say.

They shared tips on how to make that happen.

‘Even an extra $5 a month can make a big difference’

Paying just a little more than you owe each month on your student debt can reduce the amount you’ll pay overall and shorten your repayment timeline, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.

“Even an extra $5 a month can make a big difference,” Mayotte said. (You’ll want to make sure to tell your servicer to direct the additional money to your principal, so it doesn’t just apply it to future interest and payments.)

To illustrate the impacts of throwing extra cash at your student debt each month, higher education expert Mark Kantrowitz provided an example.

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If someone owed $10,000, and had a 5% interest rate, an additional $50 a month would shave nearly 4 years off of a 10-year repayment timeline. The borrower would also save more than $1,000 in interest.

Kantrowitz’s student loan calculator lets you see how extra payment amounts can shorten your repayment term.

If you’re unsure how to get the extra cash to pay down your debt quicker, consider making a budget, said Douglas Boneparth, a certified financial planner and president and founder of Bone Fide Wealth, a wealth management firm based in New York.

“If paying off student loans is at the top of your list, scrutinize your monthly cash flow to see where you might have room to allocate more money towards them,” said Boneparth, who is a member of the CNBC Financial Advisor Council.

Consider auto-pay, avalanche method

Most student loan servicers offer borrowers a discount on their interest rate when they sign up for automatic payments, Kantrowitz said. An even slightly lower interest rate will help you pay your debt down faster.

Claiming the student loan interest deduction, meanwhile, on your federal income tax return can reduce your taxable income. Your lender reports your interest payments over a certain amount to the IRS on a tax form called a 1098-E, and should provide you with a copy, too. Depending on your tax bracket and how much interest you paid, the deduction could be worth up to $550 a year, Kantrowitz said.

If that results in a bigger refund, you can direct more money toward your education debt each year. You don’t need to itemize your taxes to claim the deduction, which can reflect up to $2,500 in interest payments on all federal and most private student loans.

Yet before you accelerate payments on your student debt, you want to first pay down any higher-interest loans, Kantrowitz said. Undergraduate federal student loans disbursed last summer had an interest rate of 5.5%, while the average interest rate on credit cards is more than 20%.

The tip above is an example of what is called “the avalanche method,” in the world of debt repayment, Mayotte said. It is when you pay the minimum due on all your loans, but send extra payments to the loan with the highest interest rate.

Of course, if your priciest debt is from your education, you can use the strategy on those loans (many student borrowers have multiple loans). You can learn your different interest rates with your servicer or at Studentaid.gov. Private student loans tend to have much higher rates than federal ones.

Unless you truly can’t afford to make payments on your student debt, you’ll also want to avoid deferments and forbearances, particularly if your goal is to get out of the debt sooner than later. These pauses stretch out your repayment timeline, and your balance can swell from interest accrual.

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