Financial Planning

February 9, 2018 / Robert Dowd

Don’t Let Your Student Loans Get the Best of You!

It is graduation day, and the thoughts going through all of the graduate’s minds are mainly focused on what the future holds after completing their degree. They reminisce with friends about all the good times, the teachers, and why commencement speeches always seem to last forever. Not to mention the studying, there was so much studying!

Those graduates eventually get jobs and grow individually and professionally. They move out of their parent’s house and get their own place, upgrade or buy their first car, and become more independent. Then about six months after graduation, they receive a notification that their first student loan payment is due. Panic ensues!

“I can’t believe I have to pay this!”

“Why is my payment so high?”

“I don’t think I can afford this!”

“I have to move back home!”

“I should have never gone to college!”

This is not a time to freak out, you must keep your composure! Graduation is a big achievement and anyone who does graduate should be proud of the work they have accomplished for the past four years. What many graduates do not realize is that approximately three-quarters of their classmates will be leaving college with some amount of student loan debt. College costs are continuing to increase and are becoming a growing burden for a large portion of students. As one who has a sizable amount of student loans, I can say that I went through the same emotions and doubts, but I put a plan in place and I am on my way to conquer the student loan beast.

If there is no borrowing strategy in place before or during college, the time to establish one is during that six-month window after graduation. The following are six strategies to help pay off those student loan.

Budget Around Student Loans

Everyone has expenses, both discretionary and non-discretionary. Student loans are non-discretionary, which means they are required to be paid each month. Even if bankruptcy is declared, student loans will still be required to be paid. Those reasons are why building a budget around student loans and other non-discretionary expenses are helpful. If the budget is tight, remove some of the discretionary expenses, such as cable, dining out, clothing, subscriptions, etc., to make ends meet. Every payoff strategy should start with a budget that can be maintained.

Make More Than the Minimum Payment

Some mistake the amount owed on the monthly statement as a suggested amount to pay off their debt. Unfortunately, the minimum payment is the LEAST a borrower needs to do to avoid late fees and to have a good repayment history on their credit report. The best way to pay down the principle is to contribute more than that stated amount. Even if the extra amount is only $20 a month, it is a start! Gradually work on increasing the extra payments.

Set Up Automatic Payments

Some lenders are offering interest rate discounts when a borrower sets up automatic payments. The discount applied is usually around 0.25% – 0.50% off the current rate.  This is a great way to be consistent with the repayment of the loan because it takes the indecision out of the equation. Combining this strategy with paying more than the minimum amount increases the ability to pay off the principle faster with the added bonus of the discounted interest rate.

Larger Payments to Loan with Highest Interest Rate

In some instances, it may be impractical to pay above the minimum payment for multiple student loans. Using a strategy called the “debt avalanche method” may be of great benefit to the borrower. This is when the minimum payment is used for all the loans except for the one with the highest interest rate.

An alternative is the “snowball method”. This involves paying off the loan with the smallest balance first. There will not be as much savings on interest, but there may be a psychological benefit from closing out an account.

Refinance or Consolidate

Refinancing is a good strategy to help decrease interest rates. This means more of the monthly payments will go toward paying down the principle. When refinancing multiple student loans, the result will be a consolidated loan with one monthly payment. In combination with the strategies above, the ability to pay off student loans faster has drastically improved.

Avoid Repayment Programs

This may be a good program if monthly payments are tough to maintain with the current budget. Some income-driven loan repayment programs such as, Pay As You Earn (PAYE), lower the monthly payment and stretch the loan repayment term from 10 years to 20 years. By stretching the term, the borrower will likely pay more in interest than if they were on a standard plan. Additionally, the debt is forgiven at the end of the 20-year period, which sounds like a great benefit but the borrower will have to pay taxes on that forgiven amount. If the goal is to break free from the shackles of student loan debt, stretching payment terms hinders the ability to succeed.

For student loans to be a positive experience, as positive as paying bills can be, a plan must be in place. A plan before college would include comparing the costs of specific schools in line with the student’s degree focus. Make sure to budget around student loans, they are here for the long haul and the only way to get rid of them is to pay them off! Use different strategies such as, the avalanche or snowball method to help pay down individual loans. Pay more than the minimum payment and if the best option is to refinance or consolidate, that is a good option to becoming debt-free from college. Student loans are becoming the common burden for young professionals and having the right strategy will help tremendously.

Please contact our office if you have any questions related to student loans, college planning, or any other financial planning topics.  A member of our team can help to put a plan in place for your specific situation (610-651-2777).

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