The debt of student loans can feel like an enormous burden. If you’re a millennial (born in the 1980s and early 1990s), you like many of your contemporaries may hold back as you struggle to afford minimum payments while you save for everything else in life. Here’s how to get your newly graduated head above water.
Fair Isaac Corp. recently found that delinquency rates on student loans made rose to 15% in recent years, to $27,253 in 2012 from $17,233 in 2005. With college costs climbing twice as fast as inflation, outstanding education debt has swelled to $1 trillion, more than what Americans owe on their credit cards.
Still, plenty of young adults successfully pay the debts off. How?
Saving versus debt. Chances are you know that saving your money is just as important as paying off your debt. But how much should you save? What you should save for, and how do you prioritize between putting money away and whittling your debt?
Aim to create a cash cushion of about $1,000, a small emergency fund to help you through unexpected situations without pushing you further into debt. Also keep your big picture in mind: Repayment periods on student loans average 10 years; you probably don’t want to wait that long to save for a house or a wedding.
You can re-evaluate your budget to see if you can cut any costs or lessen some expenses. Be critical about what’s truly a need and what’s a mere want. If your multiple goals must coexist with paying off student debt, you can also earn extra money to fund savings.
Negotiate for what you’re worth at your current job or look for new positions that pay better. You can also take a side job.
Interest rates. Your interest rate is a percentage of your loan charged when you borrow money. The higher your interest rate, the more you pay to borrow. The longer your repayment term, the more you end up shelling out over the life of the loan.
Some believe in paying the minimum if your interest rates are around 2.2% or lower, reasoning that saving money to invest nets a better return. If your interest rates are on the high end — around 5% or more — prioritize how to pay them off a quickly as possible.
That’s where making extra payments come into play. The more you can pay toward your student loans, the less you pay toward interest, allowing you to chip away at the principal balance of your loan. You don’t necessarily have to pay extra all the time; pay more when you can, even if only once or twice a year.
Unaffordable payments. If you have federal loans, investigate the many flexible income-based repayment options available. Call your loan servicer and explain your situation and ask for a recommendation for a specific repayment plan. The Office of Federal Student Aid of the U.S. Department of Education also offers a guide on repayment plans, including the necessary qualifications.
You may also qualify for deferment or forbearance if you have financial hardship; deferment is a temporary period where you don’t have to make payments, and interest doesn’t accrue on your subsidized loans. Interest does accrue on unsubsidized loans. Forbearance is similar to deferment, except interest continues accruing on all your loans during the time that you don’t have to make payments.
Getting your loans forgiven, discharged or canceled is possible, but only in select circumstances (often involving military personnel, teachers, nurses, child-care providers or indebted borrowers who attended a school that’s closed).
Private loans don’t come with as many repayment options as do federal loans do, but many lenders will work with borrowers seeking forbearance. Call your loan servicer.
Refinancing – subject of recent political wrangling on Capitol Hill – or consolidating your loans are two more possible avenues. Refinancing generally improves your terms (to lower your interest rate, for example). Consolidating can make payment easier; if you owe seven different lenders, combining the loans rolls all your payments into one.
You can do both with federal loans, too.
Now that you’re armed with some essential knowledge, how do you get your loans out of your life?
Look at your entire financial situation. Do you have any other debt? What’s your salary? How much can you afford to pay toward your loans? Answers to these questions help you formulate a plan of attack.
Budget and track your expenses. Learn where your money goes and how you use it – especially if you often lack enough money to last you a month.
Evaluate expenses. After you establish your budget, re-examine your expenses. Question the value you get out of various purchases and outlays. If paying down student loans is your top priority, somehow find room for extra payments in your budget.
Earn more. If you’ve cut back on all your expenses, and are still struggling to make payments or find room in your budget for basic needs, try earning more money. You can work overtime at your job, take on additional shifts or get a second job.
Having trouble finding employment? Many individuals are making their own jobs based off of hobbies or skills they have. Do you enjoy pet-sitting, babysitting, crafting, consulting, freelancing, or organizing? Advertise your services and get the word out.
Have a plan and follow It: Paying your student loans off is going to be a long journey. It’s important to have a plan to refer back to when times get tough. Choose exactly how you’re going to pay off your debt. Pick one loan out from the rest and singularly focus on paying it down, while paying the minimum on the rest. This one loan might be the loan with the highest interest rate, the lowest balance or one you just want to see gone.
Stay hopeful: Remember, paying off debt can be a difficult journey filled with ups and downs. It’s important to build a support system and stay hopeful when you hit a roadblock. Surround yourself with friends who can relate to what you’re going through, and stick with people who help you achieve your goals.
Follow AdviceIQ on Twitter at @adviceiq.
Mary Beth Storjohann, CFP, is the founder of Workable Wealth, an RIA in San Diego. She is a writer, speaker and financial coach who is passionate about working with individuals and couples in their 20s and 30s to help them organize and gain confidence in their financial lives. She has been quoted or featured in various industry publications on the local and national level. You can find her on Twitter at @marybstorj.
AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.