8 Simple Steps To Reduce The Financial Burden Of Your Student Loans
With commencement season fast approaching, college seniors will soon be swapping their book bags for briefcases.
Unfortunately, these soon-to-be graduates are leaving campus life behind and entering the “real world” at a particularly trying time.
With a third of individuals aged 25 to 29 holding at least a bachelor's degree – a higher percentage than the total adult population – Millennials are on track to be the most educated generation in US history.
Yet, students who borrowed money for undergraduate degrees now hold an average student loan debt of $29,400, according to a new report from the Project on Student Debt. What's more, 71 percent of graduates had outstanding student loans in 2012.
When you factor rising tuition costs into this equation, it's unsurprising to learn that outstanding student loans in the United States has doubled since 2007, now totaling $1.2 trillion, according to the Consumer Financial Bureau.
The government has explored ways to address this problem with new borrowing funding models and debt forgiveness programs, but those efforts have stalled for the most part.
Still, you don't need to consign yourself to carrying that burdensome debt for decades to come. Here are some tips to help you manage and pay off those loans more quickly and set yourself on a sound financial course.
1. Pay What You Can Afford, Monitor Your Finances and Be Accountable
It's important to be realistic when establishing a payment plan for your student loans. Given the current economic climate, college graduates can expect to be underemployed for many years early in their careers.
While not always an option, it is best to avoid taking out more in student loans than you anticipate making in your first year out of college. Remember, it is not uncommon to owe as much as $12,000 per year on your loan repayments.
If you don't work with lenders to create a custom payment schedule, you'll likely be enrolled in the standard payment plan that requires you to make set payments that can be as high as $1,000 or more every month.
However, it is important to note that if you choose a lower monthly payment rate, you will end up paying more in interest. Should you decide to lower your rate, be sure to calculate the additional interests you will owe to determine what works best for you.
To do this properly, you have to stay organized. Create a spreadsheet to track your income, expenses and outstanding loans. If you have multiple loans, organize them by interest rates from highest to lowest.
Using your spreadsheet, figure out how much of your income you can allocate to paying off your debt and make payments on the highest interest rate loan first. If you have outstanding credit card debt, pay that off first. Regardless of how high your student loan interest rates are, they probably don't come close to the interest that you have to pay on your credit card bill.
While creating an effective system is important, sticking to that system is crucial. Find someone – parent, friend, significant other – who will help you track and stick to the financial system you've implemented. Being accountable to someone other than yourself can go a long way.
2. Don't Use Loans to Pay for Living Expenses
Some lenders offer loans that exceed tuition costs to help students pay for living expenses, but don't be lured into making this mistake.
It's an appealing option when you consider the additional beer, pizza and wild spring break trips to Cancun that you otherwise wouldn't be able to afford, but you need to remember that the additional interest that you'll end up paying on these expenses will only add to your financial burden.
Instead, try to figure out a way to find a way to bring in some additional income. Apply to your university's work-study program, bartend or find a part-time gig flipping burgers. If you find yourself with some surplus funds, use the money to begin paying off your loans while you're still in school. Future you will appreciate it.
3. Avoid Private Lenders
Unlike federal loans, private student loans carry variable rates, meaning the interest and payment rates are not fixed. While private lenders might initially offer lower rates than federal programs, they are unlikely to stay that way over the course of the loan.
They also offer fewer repayment alternatives and no debt forgiveness options. Worse, they often require a co-signer since the majority of college students do not have the requisite employment or credit history to secure the loans themselves.
Most students turn to their parents to co-sign these loans, meaning their credit would be impacted if you end up defaulting on your payments. Worse, the Consumer Financial Protection Bureau released a report Tuesday that warns of an often overlooked provision in private loan contracts.
This provision, according to the New York Times, means that “If the co-signer dies or files for bankruptcy, the loan holder can demand complete repayment, even if the borrower's record is spotless. If the loan is not repaid, it is declared to be in default, doing damage to a borrower's credit record that can take years to repair.”
If you do have private loans, focus on paying these off first while only making minimum payments towards your federal loans. And never consider consolidating federal loans into private loans. If you do, you'll stand to lose the repayment offers and borrower benefits that they offer.
4. It's Never Too Late to Find Grants and Scholarships
You might have sought out every scholarship and grant you could find while you were applying to school, but haven't considered continuing the hunt since arriving on campus. Look for scholarship opportunities provided to students in your academic field or through extracurricular organizations that you belong to.
Talk to financial aid advisors at your university to determine what scholarship opportunities might be available to you. Any additional money that you're able to procure could go a long way.
5. Take Advantage of Loan Forgiveness Programs
Perhaps the best way to pay off your student loans quickly is to not have to pay them off at all. There are a number of forgiveness programs that you might be able to qualify for.
One of the best options is the US Department of Education's Public Service Loan Forgiveness (PSFL) Program.
The PSLF Program is designed to encourage people to work full-time in public service jobs. By doing so, individuals carrying student loans can qualify for forgiveness of the remaining balance of their loans after they have made 120 qualifying payments on those loans while employed full-time by certain employers.
These public service professions include anything from federal, state or local government jobs to non-profits. The Consumer Financial Protection Bureau estimates that as many as 33 million Americans might be eligible to qualify for PSFL, so there's a good chance that you might be one of them.
So join the Peace Corps, Teach for America, the Military or a research institution.
Even if you aren't working in the public service, there are still plenty of opportunities to take advantage of loan forgiveness. Securing them can even be as simple as moving to a new town.
SALT, a financial resource website created by the nonprofit American Student Assistance organization, found that there are more than 60 different student loan forgiveness programs that could potentially absolve your total debt.
As Betsy Mayotte of SALT put it in an article she authored for the Chicago Tribune:
“Do you work in health care? Move to an underserved area in California and receive up to $160,000 in student loan forgiveness. Love to ski? Colorado will pay health professionals up to $105,000 for three years of service. Dentists can sign up for an additional two years for another $50,000.
Like cows? (And who doesn't like cows?) The state of Kentucky will pay $6,000 a year towards your student loans if you come to work as a vet and spend at least half your time working with large animals or those used for food.”
One thing to remember: even if you receive debt forgiveness through one of these programs, the loans forgiven might still be taxable as income.
6. Make Biweekly Payments
It's a well-known trick for reducing mortgage payments by a factor of several years, but it can be applied to student loans as well.
By making loan payments on a biweekly basis instead of monthly, you end up paying less in interest as there is less time between payments for interest to accumulate. Additionally, by committing to paying every two weeks instead of once a month, you end up making an additional 26 payments each year.
This means you're that much closer to ridding yourself of those onerous loans altogether.
7. Take Advantage of Tax Benefits
Talk to an accountant. When tax time comes around, you can deduct the amount of interest that you paid in student loans and receive quite a sizable return. For 2013, individuals could deduct up to $2,500 or the total amount they paid in student loan interests.
Essentially, this option affords individuals the opportunity to negate much of the total interest they accumulate on loans each year, making it easier to drive down their overall loan debt.
8. Be Willing to Make Some Sacrifices
All tricks and tips aside, the best thing that you can do for yourself when trying to climb from the abyss of student loan debt is to be willing to make some sacrifices.
Frugality is key. Eat out less, opt for less exotic vacations and don't make any extravagant purchases. If you're going out for drinks, consider hiding a flask in your jacket. Choose to cook at home instead of going to a restaurant.
Remember, a penny saved is a penny earned. Or at least a penny that you can invest in ridding yourself of student loan debt.
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