{"id":2475,"date":"2018-01-23T08:20:05","date_gmt":"2018-01-23T08:20:05","guid":{"rendered":"\/blog\/?p=2475"},"modified":"2023-02-14T10:46:39","modified_gmt":"2023-02-14T10:46:39","slug":"paying-off-student-loans","status":"publish","type":"post","link":"https:\/\/www.lemonade.com\/blog\/paying-off-student-loans\/","title":{"rendered":"To Pay Off Student Loans, Trick Your Brain"},"content":{"rendered":"

Here\u2019s one thing we can all agree on: paying off student loans kinda sucks. After finishing up what many call \u2018the best four years of our lives,\u2019 we\u2019re excited to move to a new city, rent a fresh place, and land our first jobs. One of the last things we want to worry about is paying off debt.  <\/span><\/p>\n

If you\u2019re paying off your student loans, you\u2019re not alone. <\/span><\/p>\n\t

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<\/i>Seven out of every ten people are at some stage of paying off their student loans.<\/a><\/i><\/p>\r\n\t\t<\/div>\r\n\t\t

<\/i>Tweet this!<\/span><\/a><\/div>\r\n\t<\/div>\r\n \n

In fact, the average 2016 grad has over $37,000 in debt (including those who graduated debt-free). (<\/span>Forbes<\/span><\/a>) <\/span><\/p>\n

Paying off thousands of dollars is no easy task, but with the help of behavioral economics, you can majorly boost your strategy. Here are 5 science-backed tips to help you say goodbye to student debt and hello to financial freedom.<\/span><\/p>\n

1. Automatically pay every month<\/h3>\n

Picture this: You come home from a busy day at work and remember a silver lining – you got your paycheck today! You open it blissfully, and begin to imagine exciting, new ways to spend your money this month. But then you remember you have to use a huge chunk of that change to pay off your student loans… womp womp. <\/span><\/p>\n

You begin to think about how much to set aside when a tempting thought creeps in: \u2018I\u2019ll just pay the smallest amount I can, so I can purchase those awesome new Adidas sneaks I\u2019ve been eyeing.\u2019<\/span><\/p>\n

This is called <\/span>hyperbolic discounting, in behavioral economics speak.<\/span> We tend to choose smaller rewards now over bigger ones later. That\u2019s because it\u2019s easy for us to understand how a current reward would look and feel, whereas later rewards seem fuzzy and abstract.<\/span><\/p>\n

\"Hyperbolic<\/p>\n

It\u2019s very difficult for our brains to think about <\/span>our future selves<\/span><\/a>. In fact, your brain shows the same neurological activity when you think about your future self as when you think about a complete stranger. (Hershfield, Hal & Wimmer, G Elliott & Knutson, Brian. 2008 – via <\/span>ResearchGate<\/span>) So when you\u2019re given the choice between new sneakers for yourself, or financial freedom for a stranger, you\u2019ll probably go with the shoes. <\/span><\/p>\n

That means putting aside money for our student loans is cognitively hard. How can we make it more effortless? <\/span><\/p>\n

Trick your brain by saving automatically<\/strong><\/p>\n

\u201cThe lesson of behavioral economics is that people only save if it\u2019s automatic. If people just put away what\u2019s left at the end of the month, that\u2019s a recipe for failure,\u201d explains behavioral economist Richard Thaler. (<\/span>WSJ<\/span><\/a>)<\/span><\/p>\n

Several studies have shown the power of automatic saving. According to a Harvard Business School study<\/a>, employees drastically increase their long-term savings when they\u2019re automatically enrolled in a retirement plans. The study found that when automatic enrollment didn\u2019t exist, employees rarely had a savings plan. When it did, the number of employees who participated in the savings plan jumped to a whopping 95%, just because it was automatic. <\/span><\/p>\n

So the trick here is to automate your student loans payments. How? You can either withhold your paycheck through automatic payroll deductions, or set up automatic withdrawals from your bank account. That way, the decision will be made for you. <\/span><\/p>\n

Bonus: All government and some private lenders charge a slightly lower interest rate if you make your monthly payments this way. Score!<\/span><\/p>\n

2. Pay more than you have to<\/h3>\n

But how much cash should you set aside, you ask? <\/span><\/p>\n

Let\u2019s review how student loans work. Each month, you get a statement that tells you the minimum payment you have to make. Real talk: Your lender only wants you to pay the minimum amount, and nothing more. That\u2019s because the longer it takes to pay off your loans, the more interest builds up, and the more money your lender makes in the long run – which is great for them, but not so great for you.<\/span><\/p>\n

To spend less overall, pay student loans quickly<\/strong><\/p>\n

So you should pay your student loans as quickly as you can. What\u2019s the best way to do that? We got to the bottom of this by sitting down with our Chief Behavioral Officer Dan Ariely. His advice? <\/span><\/p>\n

\u201cIncrease your overall payment – let\u2019s say you owe $500, make it $550. And on top of that, from time to time, when you have extra money, put it towards student loans. This will shrink the amount you pay, and help you feel like you\u2019re making progress.\u201d <\/span><\/p>\n