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How to Pay Off Student Loans Within 5 Years of Graduation

Susan Johnston

As the excitement of graduation season winds down, the class of 2014 will soon need to contend with the realities of student loan payments. The average student loan borrower graduating this year leaves college with $33,000 in debt, according to Mark Kantrowitz, who publishes the higher education resource site Edvisors.com.

Some borrowers gradually chip away at their debt for the next several decades. But others, like Andrew Meyer, 25, resolve to pay it off within a few years. Meyer graduated from Villanova University in December 2010 (a semester early) with loans in the low five figures.

Like many college students, Meyer says he didn't fully understand how student loans work when he first borrowed the money. But after the first three months of payments, he took a closer look. "[My money] almost went entirely to interest payments, which was kind of frustrating," he says. "I realized I could save thousands of dollars [in interest] by paying it off early." After careful budgeting, Meyer made his final loan payment last year and is now focusing on saving for a down payment on a home while working at SEER Interactive, a search engine optimization company in Philadelphia.

For those who'd like to pay off their loans within five years of graduation, here's a look at some strategies.

1. Take stock of your debt. First, figure out how much you owe and the accompanying interest rates, recommends Bob Gavlak, a wealth advisor with Strategic Wealth Partners in Independence, Ohio, who advises clients on student debt. In rare cases, it may actually make sense to continue paying on schedule rather than accelerate your payoff. "A lot of student loans that were out 10 or 12 years ago might have much lower rates," Gavlak says. "I've seen them as low as 1.5 percent." If you have a loan with an ultralow interest rate, Gavlak says your money may be better served by paying the loan as agreed and using the extra money to pay off higher-interest debt like credit cards or bolstering retirement savings.

But for many borrowers (and especially those with variable interest rates that could rise over time), an early payoff can make more sense. Gavlak suggests looking at both the principal borrowed on each loan and the interest rate to prioritize the payoff order. If, for instance, you have two loans at 6 percent, but one has a higher balance, he suggests making minimum payments on the smaller loan and attacking the bigger one first since it's costing you more in interest. Others suggest starting with the smaller loan, as that can help create momentum as you feel yourself making tangible progress.

Meyer kept track of his loans' grace periods and paid off two loans before the interest payments kicked in. "The grace period was just about to end, so I decided to get those out of the way first, as to not have to deal with multiple loans and interest rates," he says. "They also had the highest interest rates."

[Read: How to Pay Off $30,000 of Student Debt in 3 Years.]

2. Look into refinancing. Refinancing student loans may help lower your interest rates. "There are a lot of companies in the market that would be more than happy to refinance student loans," Gavlak says. "See what else is out there, who's willing to give you a better rate or better terms." Borrowers already have some refinancing options, but a bill introduced last month by Sen. Elizabeth Warren, D-Mass., would make the process more accessible.

However, keep in mind that there could be origination fees or other costs associated with refinancing, so make sure you've calculated the total cost of the loan, not just interest, before you refinance. Some borrowers may also qualify for loan forgiveness or income-based repayment programs, but income-based repayment may stretch out the payments rather than accelerate them.

3. Don't sacrifice your retirement or emergency fund. In the process of paying off loans, it may be tempting to cash out retirement accounts or savings accounts to zero out debt. Gavlak says this can be a mistake. He suggests stashing three months of living expenses in an emergency fund with at least some liquidity in case the car breaks down or you lose your job.

"Once you pay off the student loan, that money is gone and it's not able to be utilized by you anymore," he says. "You don't want to dip into a credit card that's potentially going to have higher interest." He also suggests that borrowers continue contributing to retirement accounts to take advantage of any company match and save for the future even as they're paying off debt.

[See: 10 Easy Ways to Pay Off Debt.]

4. Look for ways to cut costs. Grads trying to make a dent in their debt may want to minimize discretionary spending and lower essential costs. Nikki Early, 31, graduated from Richard Stockton College of New Jersey in 2006 and paid off a $3,500 loan soon after graduation by living frugally and paying more than the minimum each month. Early lived with her parents and put as much money toward her loans as she could. "I wanted to get out of debt as soon as possible," she says. "If I don't need it, then I don't usually buy it." Similarly, Meyer worked to minimize his spending by postponing a car purchase, living with roommates and bringing his lunch to work instead of eating out.

5. Create extra income streams. While cutting costs can help accelerate loan payments, there's only so much one can save on an entry-level salary, so working to increase your income or funnel extra cash toward loans is another approach. In Meyer's case, he put all his bonuses and commissions toward his loans.

Michelle Schroeder, 25, paid off $40,000 in student loan debt from undergraduate and graduate study in 11 months by supplementing her salary as a financial analyst. "Some weeks I also worked 40 hours a week doing virtual assistant work online or staff writing for other websites," she says. "All of that went towards student loans." She also earned extra cash as a mystery shopper, where she got paid to visit businesses and report on her experience.

After Schroeder paid off her loans, she left her full-time job and became self-employed, working on her blog, Making Sense of Cents, and other ventures. She encourages her blog readers to pursue side hustles if they want to pay off debt. "Even when people tell me they don't have extra time, [putting in a few hours] a couple extra times a week, it adds up," she says.

[See: The Best Side Business Ideas for Busy People.]

6. Confirm that payments are properly applied. Keep track of your payments, and check that your lender is crediting you correctly, as misapplied payments can derail your payoff plan. "It's up to the borrower to make sure that everything is being handled properly," Gavlak says. "Double-check your statements. If you have online access, make sure that when you see a payment leave your bank account [it's applied to your loan]."

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