By the time most college grads make their first student loan payment, Ruchi Patel had already paid $3,600.
She finished paying back the $23,000 she borrowed in federal student loans within two years of graduating from New York University. Her fast-track approach saved her thousands of dollars in interest over the life of her loans.
Most college students don’t realize they can make payments on their student loans before they graduate. Too many keep those annoying loans out of sight and out of mind until they absolutely must start making payments, usually six months after leaving school.
But Patel is different. During her sophomore year, she started putting whatever she could toward her student loans every few weeks. Sometimes it was as little as $40 or as much as $100.
“At some point during one of my finance classes, the light bulb went off. I was going to be screwed by the interest if I didn’t start paying,” Patel said.
The extra money came from part-time jobs she held during the school year and over the summer. She admits the small payments felt huge at the time, and sometimes took up as much as half of her paychecks.
“My bank account wasn’t empty. But what I had wasn’t much,” she said.
If she had taken the standard 10 years to repay her student loans, she would have paid more than $7,000 in interest alone over the life of the loan. Instead, she ended up paying about $3,000 in interest.
Paying down the principal of your loans faster lowers the amount in interest you’ll pay over time, said Phil DeGisi, the Chief Marketing Officer at the online student loan refinance company CommonBond.
Chipping away just $75 a month will save you $694 in interest by the time you graduate and most students are only starting to pay off their debt, according to a calculation from CommonBond. (That assumes you borrowed $10,000 with a 7% interest rate for freshman year.)
“Try to chip away as much as possible while you’re in school. Those tiny payments — however small — really do add up,” Patel said.
Although she was able to pay down her own loans so quickly, it was a small victory for Patel.
Here parents also borrowed loans to cover the rest of her tuition. Now that she’s finished her own payments, she’s transferred those federal Parent Plus loans into her name, which currently total about $135,000.
“I can’t really think about buying an apartment or house, or living somewhere I’d need a car, or getting up and moving to another city,” she said.
When it comes to that kind of debt, it’s helpful to find as many ways as possible to pay back your loans faster. Here are four tips:
1. Pay down the principal early, rather than the interest.
If you’re making pre-payments while in school, make sure they’re going to the the principal amount, rather than the interest. This might happen automatically, but it’s best to call your loan servicer to make sure.
2. Know which loans you should make prepayments on.
If you have federal student loans, you’re allowed to make pre-payments while in school. But if you have private loans, there’s a chance you could be hit with a fee for making payments early. Call your loan servicer to find out.
There are two different types of federal student loans: subsidized — which don’t accrue interest while you’re in school — and unsubsidized — which start accruing interest as soon as you borrow the money. If you’re going to make payments while still in school, choose to pay down the unsubsidized loan so that less interest accrues overtime.
3. Live at home.
When Patel first graduated, her student loan payments were very high compared to her income. She moved home, commuting four hours a day.
“It was quite a decision to make after living on my own for four years in New York City, but I kinda had to,” she said.
4. Refinance.
There are a handful of banks and online lenders that will refinance both federal and private student loans. If eligible, your new interest rate will be based on your debt-to-income ratio and credit score.
Once Patel paid off her own debt and was earning a bigger income, she was able to qualify for a lower interest rate by refinancing with CommonBond. It lowered the interest rate on the PLUS loans to 3.43% from 7.9%.
But be careful. If you refinance a federal loan with a private, you might be giving up some protections — like being able to apply for deferment or an income-based repayment plan in the event your finances take a hit in the future.