How to Repay Student Loans Faster: Three Easy Steps
If you’re tired of juggling multiple student loan payments, it might be time for you to create a strategy to repay your loans faster. For many people, refinancing is a crucial step to repaying loans more quickly. When you refinance, you consolidate your loans into a single new loan that takes advantage of a lower interest rate. Compared to historical averages, interest rates are low, and refinancing can help you lock in those low rates.
Step 1: Explore refinancing
To refinance your student loans, first you’ll need to qualify. Traditional student loans are guaranteed by the government, so lenders don’t risk their own capital when they offer funds. When you refinance, your lender is making a loan to you, and they want to know that you’ll repay it. You’ll have to qualify just as you would for a car loan or a mortgage. Here are some financial basics that lenders will examine when you apply:
- Credit score: Some lenders have no fixed minimum score, but you’ll be in better shape with a higher credit score. Maintaining a good credit score will give you the freedom to explore a range of refinancing options.
- Debt-to-income ratio: Lenders will consider your income in relation to your debts to determine how much of your income will be available to pay off your loan. They’ll want to see sufficient income to cover both the debt and reasonable living expenses.
- Job status: You’ll need to be employed to refinance, and lenders will look favorably on a stable employment history.
Focus on improving your financial basics if you’re concerned about qualifying. Review your credit report for accuracy and request corrections for errors. Paying down debt can improve your credit score and your debt-to-income ratio.
Take a look at our student loan calculator to see if you might be better off refinancing with a First Tech Student Loan.
Step 2: Create a budget
If you refinance, you won’t be able to skip or defer loan payments, so you’ll need to budget for them. Look at your bank statements to understand how you’re spending your money each month. Make a budget that accounts for both your required and discretionary spending. Here’s how to get started:
- List expenses and income
- Categorize expenses, noting which are fixed and which are variable
- Decide on a budget for each category and look for ways to reduce discretionary spending
- Review this budget regularly to stay on track and to ensure you accurately budget for unavoidable irregular expenses, such as car repairs
Step 3: Pay yourself first
The “pay yourself first” concept is one that you’ll sometimes hear from retirement planners. It means that you pay for goals, such as retirement and paying down student loans, before you spend on other items. When you pay yourself first, you subtract goal-focused spending in your budget before making other spending decisions. Automating payments for pay-yourself-first spending can prevent the temptation to splurge on discretionary items that you want but don’t really need.
The sooner you pay off your student loans the better. When you’re on track to paying off your loans, you’ll be more ready to achieve other financial goals—like buying a home—as your income rises. Now that you know more, are you ready to take the first step?