Although there are all sorts of ways that you can pay off your student loans faster, there’s no circumventing the fact that you have to make payments (of hard cash) to get rid of debt. A bit of a no brainer right? But I’m willing to bet that payments are something that a lot of people tend to overlook. Instead of payments being something that we just do, I challenge you to take full advantage of it. If you’re making student loan payments but aren’t seeing much progress, it may be time for you to buckle down and get strategic.
When it comes to your student loans, your payments matter. Every payment you make towards your debt has the ability to propel you forward, keep you stagnant or push you further into debt.
When I look back at my student loan journey of paying off $63,000, I started to make real strides towards my debt after I implemented creative repayment strategies. Through trial and error, I discovered the best way to pay off student loans through the front end method and the slow and steady method (or back end method).
So as you create or refine your repayment strategy, consider applying these repayment methods which helped me achieve my debt repayment goals in a few years.
Best Way To Pay Off Student Loans
With Two Strategic Methods
Front End Method
The front end method is when you use your savings to make lump-sum payments towards your debt.
One way to do this is by borrowing money you already have stashed away, use those funds and then pay yourself back. Or you can save with the intention of using those funds to make a large payment.
In the first instance, you’re essentially borrowing money from yourself and front-loading your payment. However for this to work, without a hitch, commit to paying yourself back and making yourself whole again.
If you use this method of repayment, it’s important that you pay yourself back because the last thing you want to do is drain your savings, get rid of your safety net and be unprepared for a financial emergency. Paying yourself back is also great if you want to reuse those funds to make another lump sum payment again in the future.
Alternatively, if you don’t want to borrow money from your travel fund or emergency savings, you can start a “repayment fund” and set money aside in a separate bank account to pay back your debt. Once you’ve reached your savings goal, make a large payment.
How I Discovered This Method
Since I saved a significant amount of money for a down payment on a house (but knew that I wasn’t ready to buy a house just yet), I used a portion of my down payment savings to make lump-sum payments towards my debt.
After making a lump sum payment, I would spend the next few months paying myself back.
Depending on how much I borrowed, some loans would take me a few months to pay back while others took closer to a year.
Since the interest on my debt (3%-6.8%) was more than the interest I was earning through saving (0.85%), it made sense for me to use a portion of my savings to eliminate my student loans. I didn’t use all of my savings because I wanted to keep some money around just in case I had to take care of some unexpected expenses. I also didn’t want to overwhelm myself by having to save a ton of money either.
Bonus Tip: When paying yourself back, save the same amount every pay period to develop healthy savings habits.
Front End Method Advantages
The front end method is a great way to see a significant decrease in your principal balance and dramatically reduce your interest while you’re at it. Student loan principal and interest have a direct correlation. Once your principal goes down so does your interest.
Another advantage is that because you’ve made a lump sum payment and will technically be “paid ahead”, you don’t have to worry about making monthly student loan payments for a while, it’s already taken care of. You can just focus on paying yourself back.
Interest will continue to accrue daily on your student loans though.
Who should use this debt repayment method?
I recommend this repayment method for those looking for a quick win and instant gratification from making a big payment.
Since I’m primarily driven by my accomplishments, I used this strategy when I wanted to eliminate an entire loan in my portfolio.
Similar to the “debt snowball” method, where you pay off small debts first, the front end method gives you the motivation to keep going.
To deepen your understanding, here’s an example:
So let’s say the balance on a particular loan is $4,500. To apply the front end method, make a payment of $4,550 (always take into account accrued interest when making a payment) and apply it directly towards that specific loan.
Once the payment is applied, that’s one less student loan in your portfolio! Yay!
However, at a savings rate of $350 per pay period, it would take you 13 pay periods (every two weeks) or 6.5 months to pay yourself back.
Lastly, access if you want to make another lump sum payment.
What’s the biggest challenge with this method, Danielle?
I found that saving and paying myself back was the hardest part of using this repayment method to pay off student loans because the “quick win” at the beginning quickly faded when it took me six months or so to pay myself back. For me, saving has always been a slow process.
Ready for the other repayment method?
Slow and Steady Method
The Slow and Steady Method (a.k.a. the Back End Method) is when you slowly chip away at your debt by making regular payments.
Although straightforward, to do this, figure out your payment frequency and how much money you can afford to put towards your debt.
For payment frequency, determine how often you can make payments either weekly, bi-weekly, monthly, etc. The key here is to make payments consistently.
Also, the more frequent your payments, the faster you pay off your student loans.
How Much Can You Afford
Will you consistently make minimum payments? Or will you consistently throw more money at your debt by making larger payments?
When paying off my $63,000 balance, I chose the latter.
Regardless of how you do it, discipline is extremely important if decide to go with the slow and steady method.
Who should use the slow and steady method?
The slow and steady method is great for those who don’t care about the quick wins but rather go with the flow by making regular payments.
This method also works well for those who want to turn on the autopilot and not worry about touching their savings and doing all the leg work that comes with paying yourself back. Or those who don’t necessarily trust that they’ll have the disciple to replenish their savings after having a go at the front end method.
Lastly, this might be a better approach if you find a better rate of return somewhere else by either investing or saving. Let’s say your student loan interest is 5% but your investment returns are 9%, it would make sense to use the slow and steady repayment method to take advantage of the 4% gain you’ll get from investing in the stock market. But if your rate of return is less than your student loan interest, perhaps it may be better to eliminate your debt first – as an aside, this is taking into consideration the opportunity cost.
To figure out the opportunity cost, ask yourself, what am I missing out on if I go this route versus another route?
How These Methods Differ
The biggest difference between these two repayment methods is the number of payments.
With the front end method, you make one big payment but with the slow and steady method, you make multiple ongoing payments. Also, with the front end method you’ll see a dramatic decrease in your loan balance while with the slow and steady method, it’s gradual.
Overall, I used both repayment methods when paying off my student loans and each helped me improve my financial health. At the end of the day, which repayment method you decide to use depends on your short-term and long-term debt repayment goals. When I wanted to make a big dent, I went with the front end method but when I needed a more hands-off approach, I went slow and steady.
Are you using any of these repayment methods? What’s the best way to pay off student loans?