If you can't afford to cover college costs out-of-pocket, student loans can be the best option for getting the money you need to earn your degree.
Student loans tend to come with lower rates than many other kinds of debt. And if you apply for federal aid, you can get borrower benefits including flexible repayment options, a low interest rate regardless of credit score, and options for loan forgiveness under certain circumstances. If it's a private student loan you're looking for, then you'll want to use online marketplace Credible to find out what kind of rates you qualify for.
But while it can make a lot of sense to take federal student loans, and even private student loans once you've exhausted eligibility for federal aid, you don't want to make repayment more difficult or costly than it needs to be. Fortunately, there are some easy ways to save money on student debt repayment so you can afford to earn your degree without post-graduation payback becoming a huge financial burden. Here are five tips to responsible borrowing.
1. Refinance your student loans
Refinancing your student loans can be the best option to substantially reduce interest costs and to make loan repayment both easier and cheaper. It involves taking out a new loan from a bank, online lender, or credit union, and using it to pay off old debt.
Refinancing tends to make the most sense if you have private student loans, as you won't have to give up federal borrower benefits when you refinance them. You can use Credible to shop around for a refinance lender that offers a lower rate than you're currently paying and apply online. If you qualify for a loan, the loan proceeds will be used to repay your old student debt so you'll owe the new lender only.
You'll want to get quotes from several private lenders to find the best refinance loans, and you should also compare the repayment timeline. If you get a lower interest loan amount but take a longer time to pay it back than your current debt, you could end up paying more in the long-run since you pay interest over a longer period.
Refinancing does require you to qualify for a lower rate in order to make financial sense, but if you can't qualify on your own, you may be able to get a cosigner to help. If you're considering refinancing federal loans, make certain you won't miss the advantages they provide to you that private lenders don't.
Credible allows student loan borrowers to compare prequalified loan rates with up to 10 lenders within minutes – without any damage to your credit score.
2. Make payments during the grace period
When you're still in school, you generally have the option to postpone payments (not make any payments) on both private and federal student loans. Federal student loans and most private loans also come with a post-graduation grace period that can last several months.
Unfortunately, interest accrues when payments are deferred on all but direct subsidized loans from the federal government. This means your loan balance grows while you're in school and during your grace period, leaving you with a larger debt to pay off after you finally start sending in monthly checks.
So, you won't want to miss payments. If you can at least cover interest costs, even during the times when no payments are required, you can avoid your loan balance from getting bigger. By doing so, you'll also make sure you don't end up paying interest on the interest accrued, which happens when your grace period ends and the outstanding interest balance is added to the principal.
3. Pay off the loan with the highest interest first
Some of your student loans will inevitably have a higher interest rate than others, especially if you take out both federal and private student loans. If you can, aim to pay off the loans with the higher balance first -- including by making extra payments on them.
The sooner you retire that high interest debt, the less total interest costs you'll pay and the easier it will be to become debt-free. You can even take the payments you were putting towards that costlier debt and transfer them to making extra payments on the cheaper loans once the expensive ones are paid off. That will accelerate your payment process even further.
4. Take advantage of an employer match
An increasing number of employers are offering assistance for repaying student loans. If you're looking for a post-grad job, consider searching for a company that offers this help in becoming debt-free.
When your payments are matched, your debt will be repaid faster and it will cost you less because you pay less interest and your employer is covering part of the bill.
5. Set up automatic payments
Many student loan lenders offer discounts if you make automatic payments. If you're able to reduce your interest rate with an autopay discount, that will mean less of your payment goes to your creditor, and more of it goes to paying the principal off each month.
You can also set up autopay for a little more than the amount due on your loans. That way, you'll effortlessly make extra payments each month without having to do it manually. Your debt balance will fall faster, your interest costs will drop, and you'll become debt-free much sooner.