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Pay Off Student Loan Debt Faster With This Easy 5-Step Formula

According to the Federal Reserve Bank of New York, 11.5% of student loans are delinquent by 90 days or more, or are in default. Although this seems like a small percentage, for the borrowers faced with mounting defaulted or delinquent student loan debt, the effects can be devastating. Delinquencies and defaults can negatively affect your ability to borrow more in the future, increase interest rates, and even cause tax refund offsets or wage garnishments. This can be avoided with just a few specific actions.

General Student Loan Debt Facts

First, let’s start with a general picture of the student loan landscape. The most recent reports indicate:

  • There is $1.56 trillion in total U.S. student loan debt
  • 44.7 million Americans have student loan debt
  • 11.5% of student loans are 90 days or more delinquent or are in default
  • The average monthly student loan payment (among those not in deferment) is $393
  • The median monthly student loan payment (among those not in deferment) is $222

Pay Off Your Loans Faster

Paying off your student loans at a quicker pace can save you, the borrower, money in the long run. Here are five steps you can follow to get ahead of the game:

  1. Make more than the minimum payments. For example, let’s assume you have $100,000 of student loan debt at a 7% interest rate with a standard 10-year repayment term. By paying only $100 extra per month, you can save $4,696 in interest costs and pay off your student loans 1.08 years earlier.
  2. Get advice from a professional financial advisor. Advice from a professional can make all the difference in the world when it comes to getting the most “bang” for your retirement buck.
  3. Split your payments in two. Say you owe $30,000 in student loans with an average interest rate of 7%. Over a standard 10-year repayment period, you’d be making monthly payments of $348. If you instead make $174 payments every two weeks, you’ll be debt-free 13 months sooner and save $1,422 in interest.
  4. Refinance. You can potentially save tens of thousands of dollars throughout the life of your loan by refinancing. There are three main benefits to refinancing student loans:
    • You can get a lower monthly payment, freeing up cash for other expenses or investing.
    • You can pay off your loan faster, saving you money in interest.
    • A lower monthly payment decreases your debt-to-income ratio, making it easier for you to qualify for a mortgage.
  5. Invest. If your student loan interest rates are less than 6%. Then you have some room to use the market to your advantage. Here is an example:Let’s say you only have $50,000 in student loans. With a 20-year term and a 4% rate, the monthly payment will be $303. If you contribute $500 per month to your payment, you’ll be student loan debt free in around six years.You start by investing $500/month in a tax-sheltered portfolio at a yearly 8% rate. You’ll have nearly $46,000 in your portfolio at the end of six years. Your student loan at that time would be $38,754. After just six years, your investment portfolio could exceed your student loan balance by $7,246.

These strategies require a full overview of your financial situation and goals. Who better to help you through this process than one of our CERTIFIED FINANCIAL PLANNER™ professionals? Sign up today to get started!

Freeman Capital Advisors is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. 

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