For many people, their student loans will be the largest debt they ever carry, second only to a mortgage.
In Canada, the average university graduate finishes school with $26,000 of debt. In the USA, the balance is a little higher at $30,000 of debt. However, these numbers don’t tell the whole truth, because some graduates have no debt at all, which means those that do owe student loans owe much more than the “average”.
How long should it take to pay off student loans?
Ideally, you want to pay off your student loans as fast as possible, but your timeline will depend a lot on your income and personal financial goals.
A good target to set for yourself is to try to pay off your student loans in half the time of the official loan term.
Student loans in Canada typically have a term of 10 years, which means you should try to pay them off within 5 years of graduation. Student loans in the USA can have terms up to 25 years, in which case you would want them fully paid off within 12 to 13 years of finishing your degree.
But there’s no law that says you can’t pay off your loans faster than that. If your debt is manageable and your income allows it, you might be able to pay your student loans off in only 2 or 3 years. Maybe even 1!
How can I pay off my student loans faster?
It’s easy to pay off student loan faster, all you have to do is one simple thing: put more money towards them.
Increase your regular monthly payment
The simplest way to pay off your student loans faster is to increase your regular monthly payment. Usually, your lender makes this as easy as logging into your student loan platform online and changing the payment terms of your loan.
If you can afford it, double the minimum monthly payment of your student loans. This is the shortest way to paying off your student loan in half the time! If doubling your student loan payment is not feasible, increase it by any amount that is. Even if you can only afford to put an extra $25 or $50 per month towards your loan, that will shave months or even years off your repayment plan.
Because any increase in your student loan payment goes directly to the principal balance, even an amount as small as $50 will reduce your student loan balance by $600 in one year. That’s $600 that’s not incurring interest for the lifetime of your loan! Do it 3 years in a row and that’s $1,800 off your principal balance that’s not adding interest to your monthly bill.
No amount is too small! Increase your student loan payment by $5 if that’s all you’ve got!
Increase the frequency of your payments
Another quick way to pay off your student loans is to change the frequency of your payments. Most student loans require payments on a monthly basis, but you can change this to bi-weekly or even weekly.
It might seem like a small change, and it often doesn’t even require you to change the payment amount. But because of the way interest on loans is calculated, increasing your payment frequency can reduce the amount of interest you pay over the lifetime of your student loan and even increase the number of payments you make in a year, and therefore get your loan paid off faster.
If you’re on a monthly repayment schedule, you’ll make 12 payments in a year. If you switch to bi-weekly, you might think you’ll double the frequency to 24 payments, but because there are 52 weeks in the year, you’ll actually end up making 26 payments in a year. That’s like making one full extra monthly payment!
Make additional lump sum payments
Another easy way to pay off your student loan faster is to make additional lump sum payments. You can leave your regular monthly payment as is, and simply throw extra cash towards your student loan whenever you have it. Great sources of large extra payments are things like your income tax refund, a bonus at work, money you earn from a side hustle, or cash you make from selling items you don’t need.
Even if you can afford only a small amount like $20, it’s worth it to put it towards your student loans. This technique is called the Debt Snowflake, and it’s useful to pay off student loans as well as other forms of debt.
Even an extra $20 per month will knock off $240 from your student loan principal balance in one year. Depending on your student loan balance, that might equal one full extra monthly payment!
What happens if you never pay off your student loans?
If you don’t pay off your student loans, they don’t go away.
Student loans cannot be discharged in bankruptcy
For people dealing with crushingly large debt balances, the fantasy of declaring bankruptcy to make it all go away can seem appealing. After all, if it’s going to take you 15 years to pay off your loans but only 7 to recover from bankruptcy, wrecking your credit can seem worth it.
Student loans are only forgiven in rare circumstances, and the terms aren’t great. Essentially you have to live in poverty for more than a decade to even have a shot at student loan forgiveness.
If you’re stuck, check out our post How to Get Help Repaying Your Student Loans.
… for many, student loans actually cause bankruptcy
The fact that student loans can’t be done away with easily means they tend to suck the life out of any other financial goals. New grads are left without the cash flow necessary to save an Emergency Fund or start putting money aside for retirement, or even day-to-day expenses. Many people end up resorting to credit cards and lines of credit to fund regular expenses like rent and groceries.
Accumulating debt to survive only works until you run out of credit. Once you hit a wall where you can’t borrow any more money and you can’t pay off your balance, you have to declare bankruptcy… and most of your debt will be wiped clean, except for those student loans.
But wait! There are a few reasons you might not want to pay off your student loans too fast
Being debt-free is nice, but believe it or not, there are a few reasons to carry your student debt a bit longer even if you can afford to pay it off quickly. Here are some reasons you might hang on to the balance, even if you can afford to pay off your student loans faster:
You’re carrying around other high-interest debt
If you have any other debt on top of your student loans, particularly if its high interest, you probably want to focus on paying down those balances instead. Student loans are usually low-interest debt, and if they are government student loans, often the interest is tax-deductible which makes it even more affordable.
You have no credit history
Student loans are good for your credit score, so if you’re trying to build a solid credit history, you might want to let them linger! I know it seems like counter-intuitive advice to hang on to debt to boost your credit score, but unfortunately, that’s how it works.
Your credit score is a measure of how responsible you are at managing debt, and the biggest factor in its calculation is your repayment history. Longer repayment history is better, which means keeping your student loan payments around to build up that repayment history is better.
You have no emergency or retirement savings
If you have no other savings and investments, you should direct yourself to build up an Emergency Fund and saving for retirement before you try to get to debt-free. Getting out of debt isn’t the only aspect of good financial management, and it’s shouldn’t be your sole focus either.
Regardless of how much debt you have, you should be saving for emergencies and setting a small amount aside for retirement. Having an emergency fund is more important than paying off debt.
You’re planning to go back to school
If you’ve finished one degree but have your eyes set on another in a few years, there’s no rush to vanquish your entire student loan debt. Once you’re back in school, any remaining student loans you have will go back to no-interest, no-payment. For this reason, there’s not a huge incentive to pay them off in the interim, and you’re actually better off saving your cash for when you’re in school.
Your student loan repayment journey might not be a straight line
When it comes to paying off large debts, all that matters is that you keep doing it. Whether you’re making small or large payments, or sometimes need to take a break from your repayment strategy, that’s okay. All that matters is that you get to debt-free.
Ready to begin paying off your student loans? Check out these posts for inspiration: