I come from a country where education is highly subsidized. True there is no social security which is a big disadvantage and doesn’t outweigh subsidized education. But, I graduated with almost $0 in tuition cost. My only expense was the living cost while I was in a dorm. Even the dorm had a very nominal rental fee. After living in the USA for the last 10 years and after watching 100’s of close friends graduating from college with an enormous student loan, I wonder if the new graduates are really happy with their first job or are they worried to repay their debt.
Let’s start with some statistics. Almost 40 million Americans have student loan debt. The aggregate amount of loans is $1.2 Trillion, 84% increase from 2008. Now this enormous debt started putting pressure on the US economy. While it’s arguable whether govt. should come for helping the students and extend tax breaks, loan forgiveness or other perks that they generally extend for businesses, let’s try to find a solution for your debt problem when you’ve just graduated.
Before we start, if you’re still in college, have a look at my post on side income ideas for college students, which I compiled by interviewing students from various universities. It’s always better to graduate with lesser debt, rather than relying on your first job to pay student loans off. If you can save $500 per month from your side income, that’s $24,000 in 4 years of college.
While much of the debt is unavoidable, depending on the size and capacity of student loans, there are steps you can take to effectively minimize your debt from this point onward.
A plan and a lot of hard work are what you need to pay off your student loan. Let’s say you have a $50,000 outstanding loan when you start getting your paycheck. Decide the time frame by which you want it to be paid off. Then calculate monthly required payment to meet the target. You can use the FSA repayment calculator for this purpose.
Once you have the monthly amount known, make sure the amount goes directly to your loan account from checking account before you get a hand on it. This should ensure you don’t deviate from your plan.
You can improve upon your plan further by contributing more money and paying off the loan earlier than the set goal. Take it as a challenge. We love challenges and we get satisfaction upon meeting them. So let’s make debt repayment before the target date a challenge!
I have seen people doing it, in our work we take a good number of fresh graduates every year. Many of ’em followed the above approach and are now debt-free within first 2 years of their working life.
So, setting a plan and trying to beat it works like a charm, especially for the younger generation.
Now there are other methods that you can try that should make your loan repayment even more satisfactory. Take the financial responsibility for your post-graduation life by following these steps to effective debt management:
Managing Student Loan Debt After Graduation
Managing student loan debt is no different than managing other debts. The only difference is in the rate of interest. Student loan usually carries a lower interest rate.
1. Check the federal loan repayment options
The federal loan options plans are very flexible and less stressful. Some plans require you to make only $50 a month and can span up to 25 years.
Other options include the extended plan that requires you to pay $50 for 25 years. If you have low income, you could go for the income-based repayment plan that allows
When you take any of these options, all you need to do is maintaining consistency over time to avoid negative impacts on your credit rating and access to finances.
2. Apply for a credit card in the final year but seldom use it
Sounds odd, though, right?
Applying for a credit card in senior year is a great way to get started towards establishing a credit history you will require after graduation, from paying on utilities and renting an apartment to buying your first car and getting insurance.
While it can be tempting to college students to max out cards, racking up debt can haunt you beyond graduation. Avoid this from happening by applying for a credit card in your senior year, as it takes up to six months to establish a decent credit history. Go for a secured credit card if you have initial troubles qualifying for an unsecured credit card.
The only route to prove yourself responsible with credit is to use it wisely. However, make sure it isn’t gathering dust in your wallet by spending on necessities such as utility bills while avoiding the habit of buying luxuries.
I am only bringing this point as having a good credit score, makes our life easier, saves a lot of money while buying a car or a home (or practically anything). The other day I was waived off the deposit requirement with FPL due to my excellent credit score.
3. Earn more and on side
Easier said than done. There are ways still if you want to try. Nothing is impossible. There are various ways to earn money on the side, even by using your private browsing time using the internet. You can even earn by playing games online.
At your work, you can excel and get raises. Job switch is a very effective way to grow your salary in an inorganic way as opposed to sticking to one company for years and using the yearly appraisals to increase income. Negotiate salary at your new job hard. The increase in income can be used to pay off your student loan.
One effective strategy would be to make payments multiple times a month. Every time you get extra income, deposit in your loan account. This will keep you motivated and give you that push you’d need often.
4. Make payments early and live cheap
Living expenses can be costly, so instead of waiting till the last minute to pay bills, which places you at risk of missing a payment and increasing your interest, make it a habit of paying your rent and other bills early.
The emphasis should be on saving and avoiding extra costs. As long as early payments is a behavior integrated into your financial life, your savings will grow naturally along with your future income, which would supplement your debt management plan.
When it comes to living, carry the habit of pinching pennies that you developed during the four years of college. Certainly, you want to live in a furnished apartment, but you can wait a year or two until you experience firsthand what you can afford, what things cost, and what’s important to you in terms of future investments.
Negotiate on everything. Price shop before you buy things. Price comparison websites and apps should be used every time you make a big purchase. See my post – 101 ways to save money.
5. Consider loan consolidation and forgiveness
Student loans and federal loans operate differently when it comes to consolidation. Direct loan consolidation in case of consolidating multiple federal loans simply combines loans into one, making repayment flexible for graduates who may have taken multiple loans separately. They can just make one payment.
When it comes to private loans, the process is similar to the usual consolidation, where a new interest rate is calculated based on your credit score before a loan is procured.
After a few years out of college, when you have developed good habits of managing credit responsibly and making timely payments, you will have a higher credit score than you had upon graduation, and this will be the best time to consolidate private loans; you’re more likely to receive a better interest rate.
Compare student loan refinancing rates to find lenders who fit your needs, if you take this route.
The other option is to find your way out with loan forgiveness programs.
These programs are designed to encourage new graduates to work in public service fields of high-need fields by paying off some of the college loans. Common fields include volunteer organizations, health professions, teaching, and public safety.
In some cases, the forgiveness program may qualify you for 100% forgiveness.
6. Look at alternatives
Some graduates may be eligible for forbearance and deferment, which can postpone their payment dates if they are unemployed or planning to study further. This is a better alternative than defaulting on loans, but it shouldn’t be considered as a long-term solution.
Such alternatives are basically to get you through tough situations, but you’re going to end up owing a lot of money if you continue to lean on them over the long term. Take heed of these alternatives while you learn to manage your credit and develop good financial habits to help you downsize debt.
7. Try to avoid another form of debt
You must try to avoid taking on a mortgage or a car loan while you’re repaying student loan debt. Avoid buying a new car, if possible. But things only when you need them. Do not splurge on your credit limit.
While you should always pay off entire credit card balance every month, as a precautionary measure, you should reduce credit card usage. Handling credit is a mind game and I have seen wise men falling for the lure.
Make your plan in such a way that you avoid taking on a mortgage. Make a plan to buy a home as soon as you repay your student loan. This should add extra urgency to your mission.
Examples from real-life – How people are paying off student loan debt faster
Through extra income and discipline, Lance managed to pay off his and his wife’s $80,000 student loan in 3 years. Here’s Lance’s story. They just went after creating side income and made sure they were not laid off at work. Even with a day job I write this blog, partly for my interest and partly to earn advertisement revenue, which is a side income for me.
Here’s how Joe Mihalik, a Harvard MBA paid off over $90,000 debt in just 7 months. He went to extreme frugality and saved almost his entire salary for 7 months. he even rented out rooms of his home to raise income. Want to know how to live life extreme frugal? here’s my blog – living like in the 19th century and how to live with $10,000 a year.
Mathew Burr shares a few tips on his journey towards 0 student loans, which are extremely helpful for everyone struggling with debt.
An interview with Marnie Galloway, who paid off $48,000 in 4 years should motivate you in your journey.
Readers, if you’re struggling with student loan burden, there’s a ray of light and there’s away. But only will, determination and a lot of sacrifices can get you out of the burden faster.