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The BEST Strategy for Paying off Federal Student Loans FAST (It鈥檚 not what you think!) - YouTube
Channel: The Bemused: Making Sense of Money 馃挵
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if you have federal student loans and
you want to pay them off as quickly and
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efficiently as possible
boy do I have a treat for you today in
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today's video I'm showing you a
four-step strategy for optimizing your
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student loan repayment and sharing what
no one has told you about how to pay off
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your student loans fast spoiler alert
the path I'm showing you today has
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nothing to do with consolidation or
refinancing and this is definitely not
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your cookie cutter video so make sure
you stay tuned
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hey wealth builders and welcome back to
another episode if you're new around
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here my name is Akeiva and on this
channel we talk about all things money
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for young adults just like me so if
you're into that kind of thing I hope
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you come join the squad by hitting that
subscribe button
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and turn on the post notification
bell so that you never miss when we post
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new videos so those of you who've been a
part of the squad for a while know that
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I have currently over eighty thousand
dollars worth of federal student loans
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right now I am in rapid debt pay down
mode and my current focus is paying down
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my car note which I plan to have paid
off by the end of the year and after
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that it'll be go time for my student
loans so I asked myself what is really
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the best way to maximize my student loan
payments and this is the four-step
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method that I've devised step one is to
set up auto debit with your student loan
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servicer setting up auto debit from your
bank account not only ensures that you
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never miss a payment and that prevents
your account from becoming delinquent
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and screwing with your credit it also
reduces the interest rate on your
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student loans by 25 basis points or a
quarter of a percent so if one of your
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student loans carries an interest rate
of 6% for example by setting up
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auto-debit you reduce your interest rate
to five point seven five percent which
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can save you hundreds of dollars over
the life of your repayment step two is
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to determine the best repayment method
now I'm sure that most of you by now
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have heard of the debt avalanche method
as being the best way to pay off debt if
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you're unfamiliar with
what the debt avalanche is it's the method
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of paying off your debt in order of
highest interest rate to lowest interest
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rate regardless of the size of the debt
in the vast majority of cases it is the
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fastest way to pay down debt and results
in the least amount of interest paid
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over the life of your loans I actually
went into the math to prove that theory
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using this awesome spreadsheet that I
found online and I'll make sure I link
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to it in the description box below so
that you can check it out as well this
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spreadsheet compares the debt avalanche
method the debt snowball method which is
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paying in the order of lowest balance to
highest balance and also compares
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against pain from the highest bounce to
the lowest balanced debt and this is all
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using your specific debt so like I said
I will link to that spreadsheet in the
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description box below because I found it
to be a really helpful really powerful
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tool in short when I compare to the
bottom line amount of interest that I
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would pay under each of those plans the
debt avalanche, the debt snowball and
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paying in order from highest to lowest
balance the debt avalanche method came out on
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top the difference in the amount of
interest paid under each of those plans
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that that Avalanche debt snowball and
paying from highest balanced set to lows
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balanced debt the spread wasn't that big
for me actually because coincidentally
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the interest rates on all of my debt
pretty much are directly inversely
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correlated to the size of my debt so
chances are the gap is much bigger for
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those of you who have more varied loan
balances and interest rates step three
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is to choose the right federal repayment
plan and this is key so listen up with
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federal student loans many of us tend to
forget that just because you have one
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monthly payment does not mean that you
only have one loan in fact most of us
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will have eight separate student loans
carrying four different interest rates
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just from undergrad alone the key to
remember is that your one monthly
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student loan payment is really just the
individual payments for each of the
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individual loans added together so when
you make your payment your student loan
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servicer splits that amount between all
of your loans so in an ideal world if
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you're using the debt avalanche methods
to pay off your debt you would only want
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to make payments toward the loan that
has the highest interest rate which is
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the loan that you actually want to pay
off first but since you can't do that
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the key is to get your student loan
payments as low as possible that way the
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minimum amount you have to pay on each
individual loan is minimized and you can
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use any additional funds that you've
budgeted to put towards paying off debt
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only toward the principal of that
specific loan but you actually want to
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pay off first and it's really important
when making that additional payment
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above and beyond the minimum that you
specify that you want that additional
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payment to go toward the principal
balance of that particular loan so how
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do you get your payment to be as low as
possible a good place to start would be
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the good old federal student loan
repayment calculator and I've mentioned
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that several times on the channel before
and it'll be linked once again in the
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description box below so that's what I
did I went on I linked my federal
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student loans and then looked for the
repayment plan that resulted in the
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lowest initial monthly payment now I
personally didn't choose any of the
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repayment plans that are income based
because I didn't want to be in a
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situation where my repayment was
fluctuating wildly from year to year you
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know based on income changes and being
an upwardly mobile college grad I knew
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that most likely my income would just
keep increasing from your year and so I
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didn't want my minimum payments to be
increasing along with it here's the
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thing many people recommend the standard
ten year repayment plan as the best plan
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for paying off your debt quickly however
the issue is that this plan also results
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in the highest minimum monthly payments
and that defeats the purpose of what
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we're trying to do here so for me I
chose the extended graduated repayment
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plan and if you guys want another video
going more in depth as to the different
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payment plans it exists and just
explaining the differences between them
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let us know in the comments below on the
extended graduated plan my loans are
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amortized over 25 years payments on this
plan start off really low and are
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designed to only cover interest in the
first few years of the plan and then it
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gradually very slowly increases over
time so that you're able to hit some of
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the principal as time goes on so under
this plan
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I'm making the smallest amount of
monthly payments possible while keeping
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my loans from growing and being able to
focus on paying off the debt that I want
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to which is my card oh do I intend on
having my student loans around for 25
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years absolutely not
however this plan gives me the most
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flexibility and control around paying
off my debt another perk of choosing
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this plan is that because my payments
are so low it gives me a little bit of a
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buffer in case I fall on hard times for
example so they don't have to turn to
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things like forbearance and deferment or
potentially missed payments which could
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have a catastrophic effect on my credit
score now in the same spreadsheet that I
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showed you guys a little earlier I took
things a step further and calculated the
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interest that I would pay over the life
of my repayments under both the standard
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repayment plan and the graduated
extended repayment plan and I did this
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by messing with the required monthly
payment over here in this column and
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again the ideal scenario came out to be
exactly what I expected
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I paid the least amount of interest by
combining these an avalanche method with
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the extended graduated repayment plan
now step four is an easy one make
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payments as soon as you have the cash
student loan interest compounds on a
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daily basis so the sooner you're able to
make payments the more you'll save in
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interest so if your payment isn't due
until the 8th of the month but you have
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the money on the first go ahead and make
that payment and save yourself some
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money now a quick note on consolidation
and refinancing and why neither of those
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strategies were right for me so when you
consolidate your federal loans all
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you're really doing is combining all of
your loans into one massive loan and the
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interest rate on that loan is just the
weighted average of all of your existing
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interest rates to begin with so you're
not really saving anything and you're
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removing the possibility of picking and
choosing which loans you want to pay
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additional money to now let's talk about
refinancing at one point I consider
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refinancing my parent PLUS loans into my
own name and I've made a video on that
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experience that I'll link in the cards
above I ultimately did not go with that
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option and I explain why in that video
so let's summarize to truly optimize
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your student loan payments you should
first set up auto-debit with your loan
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surfacer choose the right repayment
method which in my case was the debt
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avalanche method combine that with
choosing the right student loan payment
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plan that will result in the lowest
minimum monthly payments and then using
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additional capital to focus just on the
loan that you want to pay off first and
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then lastly make sure that you make the
payments as soon as you have the cash
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available if you got value from today's
video go ahead and write the word value
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in the comment section below if you have
any questions on debt or student loans
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specifically or if you have any other
suggestions for future videos also let
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us know in the comments below
before you go don't forget to come join
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the wealth builders squad by hitting that
subscribe button and turning on post
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notifications by hitting the bell and to
learn more about all things money for
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young adults make sure you hit one of
those videos that's coming up on your
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screen right now to keep watching thanks
so much for spending this time with me
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and I will see you in the next video
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