This past spring, another cohort of college students moved out of college after graduation. The transition from life as a student to life as a working professional is not easy. Some college graduates might have been successful in finding their first jobs. Others, however, might still be searching for theirs. College graduates, on the threshold of embarking on their professional careers, often have dozens of things to deal with. But they should not let these activities distract them from another equally important one i.e. their student loan repayments.
Student Loan Repayments Will Commence Soon for Class of 2015
The first experience of credit for many college students typically involves using credit cards. In many cases, the credit limits are not very high. In addition, some parents deal with the payments of balances on these cards. As a result, not many students get a taste of using (and repaying) credit. To an extent, this approach changes when students take out student loans to pay for college. The amount of the loan might rattle some students. Despite this, students seldom give a thought to these loans because they don’t have to repay them while they’re still in school.
The time for reckoning typically comes some months after the students graduate. As such, the students who graduated this spring would be receiving their first intimations for student loan payments soon. This is when the enormity of the debt they have incurred during their college years usually sinks in. The total amount due might seem enormous. But it is worth noting that you don’t need to repay the amount all at once. As long as you can keep making timely payments, you will see the balances dip over the years.
How to Deal With Your Student Loan Repayments
The average student typically has to deal with multiple student loans. In this scenario, Robert Farrington advises students to:
- Pay the Minimum Amounts for Each Student Loan: Neglecting to do this could have severe implications on your credit score. In addition, it could jeopardize your ability to qualify for various government programs regarding your debt as well. If you fail to pay your Federal loans for an extended duration, your loan will go into default. Thereafter, the government has the authority to garnish your wages and your tax refunds too.
Some students might find that they are unable to make the minimum payments on their student loans. These individuals would need to check their repayment plans. Federal student loans usually offer income based repayment plans, which can reduce the monthly repayments due based on the borrower’s ability to pay.
- Tackle Private Student Loans First: Once you’ve made the minimum payments for each student loan, see if you can contribute anything extra to reduce your student loan debt. In many cases, students take up side jobs for earning additional cash. If, after paying off your minimum amounts for each student loan, you have some extra cash left over, consider using it for repaying your private student loans. Private student loans are quite rigid in terms of their repayment schemes.
Unlike Federal loans, they don’t offer student loan forgiveness programs. Nor do they feature any income based repayment plans. Furthermore, private student loans usually have higher interest rates than Federal student loans. So, to save yourself from paying massive amounts of interest, put any extra cash you have toward repaying these loans. Some students might find themselves struggling to repay these loans. The best alternative for them is to check out various loan comparison sites. This will enable them to find lenders who can refinance the loan at relatively lower rates of interest.
- Utilize the Debt Snowball (or Debt Avalanche) Method for Getting Rid of Your Loans: Once you’ve repaid your private student loans, focus on dealing with your Federal student loans. There are two ways of doing this.
The debt snowball method, suggested by Dave Ramsey, involves paying off your smallest balances first, while making minimum payments on the other loans. The strategy attempts to achieve peace of mind by clearing off your smaller debts before repaying your larger debts in a more aggressive manner.
The debt avalanche method, in contrast, involves paying off loans with the highest interest rates first. Once you repay the loan with the highest interest rate, you focus on repaying the loan with the next highest rate of interest. This method does not provide the rapid results of repaying loans as the debt snowball method does. But, it does yield some savings in total payments over the entire loan repayment process. Financially speaking, this method offers better value than the debt snowball method.
Tips to Consider for Repaying Your Student Loans Faster
Given the ever-increasing volumes of student loan debt, it’s not difficult to understand why people term the student loan debt situation as a crisis. Various researches have shown that the growing burden of student loan debt has had a considerable effect on the lives of many borrowers across the country. For instance, the massive amounts of debt they carry has forced many borrowers to defer their plans for purchasing a home or starting a family.
Similarly, earlier this year, researchers at the University of South Carolina found that student loan debt has a significant effect on the health of borrowers. They found that students having large amounts of student loan debt exhibited a greater likelihood of suffering from a variety of mental health concerns, such as depression, stress and anxiety. This is why it is better to suffer in the short-term by leading a frugal lifestyle, rather than letting the burden of debt prevent you from starting a family or embarking on your dream career. Lou Carlozo highlights the following ways by which you can attempt to get rid of all your student loans by the time you reach 30.
- Prepare a Detailed Budget: Preparing a list of your monthly earnings and expenses is one of the best ways for managing your finances. Search the internet for free budgeting tools and applications. Use these for determining how long it would take you for repaying your student loans. Once you settle on a budget, ensure that you stick to it.
- Live With Your Parents: Oftentimes, rent can be the single, biggest head of expense for many college students. Curbed Chicago states that the rental rates for a one-bedroom apartment in millennial-friendly Chicago neighborhoods could easily exceed $1,200 per month. By living with your parents, you could save a considerable sum of money because you don’t need to pay the rent. Use this for reducing your levels of debt.
- Explore Ways of Augmenting Your Earning Capacity: Any additional source of income can be invaluable for reducing your student loan debt. Therefore, look for ways to enhance your earning capacity. From serving food to babysitting, you could pick from a number of opportunities. Use the income from your main job to meet your living expenses. Thereafter, use the additional income for reducing the principal on your student loans.
- Lead a Frugal Lifestyle: Many college students spend exorbitant sums of money on vacations, cars, big screen TVs etc. Avoid this urge to splurge. Instead, channelize your energies toward repaying your loans. Once your debts are over, you would be able to spend your money on anything you want anyway.
- Refinance Your Student Loans: Fresh graduates with a single job and good credit can benefit most from refinancing their student loans. Both these factors could help them secure attractive terms on the refinanced loans. By refinancing the loans at lower interest rates, they can reduce their minimum monthly payments. However, by continuing to pay their existing monthly installments on the refinanced loan, they can reduce the duration of the loan. Borrowers would do well to consider student loan consolidation plans offered by online platforms such as Earnest.
- Consider Public Service Loan Forgiveness (PSLF) Programs: The federal government has formulated a Public Service Loan Forgiveness (PSLF) program. Under the terms of this program, you could receive loan forgiveness for any remaining balance on your federal student loans after making 120 qualifying monthly payments. To be eligible for this, you’ll need to work for a government organization at a federal, state or local level. You could also qualify for this program by working for a tax-exempted, non-profit organization (or a 501 (c) (3)).
- Volunteer for the Peace Corps: If you avail of loan programs through the Peace Corps, you could reduce your loan balances considerably. At the same time, you could get to travel around the world, while having your living expenses covered. For instance, if you have a Perkins Loan, you could receive a cancelation of up to 70 percent of the loan. For this, you would simply need to provide four years of service with the Peace Corps.
Many students feel intimidated by their student loans. However, the trick toward repaying these loans quickly lies in feeling informed and empowered. And, the best way to feel in control of the situation is to organize your finances and determine where you stand. Once you know your position, figure out how soon you can realistically repay your loans. Thereafter, ensure that you stick to your goals and you will be able to become debt-free within the estimated timelines.