You’ve finally finished several years of college and now have a diploma in hand. Congratulations! The world awaits you . . . and so does the loan company. While classes are over, monthly loan payments are just beginning. No one told you what all those forms you signed really meant once you were out of school. Now you’re stuck with a mountain of student debt. So what’s the smartest way to pay back your student loan?
Paying back student loans is a process that may take years. However, you can significantly shorten the period by adopting smart payment strategies.
Whether you graduated with a degree in business or theater, the same principle applies: spend only what you need. Because recent graduates have more income from a job than as a student, they are frequently tempted to live outside the limits of their paycheck. Not only does this present problems for their current lifestyle, but it also magnifies the debt already accrued in school.
If you’re living in debt, you need a budget. Tally up the cost of the necessities needed to survive (food, rent, car payments, health insurance, etc.). Take the remaining portion and dedicate it to your loans. Learn how to shop smart with coupons to get the best deals at the grocery store. You may even need to switch stores you shop at to save. That may mean leaner meat, but it will also mean fewer loan payments in the future. To gain more money, get an extra income, like being a rideshare driver or tutor.
The cold hard truth is that aggressively paying off loans will not be fun. While your friends are going on vacation, you may be stuck at home eating a bowl of Wheaties. But unlike them, you will not still be paying loans in ten years.
Choose Payments Wisely
Loan companies expect you to make a minimum payment toward your loan every month. But if you pay only that amount, you will end up paying more money over time because of accumulated interest. When you registered for a loan, it came with an interest rate, either fixed or variable. A fixed rate loan is easily calculated and predictable for planning expenses. An adjustable rate loan changes over time, depending on the decisions of the creditor.
Some people think that paying off smaller loans is better than the larger ones, but this may not always be the case. Look at the interest rates of the loans and pay off the higher rate ones first.
Since the adjustable rates are unstable, it is often best to pay off these loans first.
Make More than the Minimum Payment
When you make a payment, consider adding an extra percentage to it or making an additional payment every other month. Either way, payments beyond the original amounts will go toward the principal, the amount you actually borrowed. This decreases the amount of interest you have to pay. And that could be a lot. By making minimum payments on a $10,000 loan at 6% interest each month for 10 years, you would be paying over $3,322.46 in interest, almost a third of the amount borrowed.
Enroll in Automatic Payments
Loan companies often send you a payment booklet or schedule of payment dates. However, it can be easy to forget those. To avoid missing payments, sign up for automatic withdrawal from your loan company. Auto payments also have the advantage of keeping you disciplined in spending. If you know that loan money will not be there, then you won’t be tempted to blow an entire paycheck on a road trip.
Pay While in School
If you are forward thinking as a student, you can apply yourself to making loan payments while in school. Granted, the amount you make waiting tables may not be much, but it can whittle away at the interest.
Several schools and the federal government have programs that offer loan assistance or forgiveness to certain types of workers. Peace Corp workers and teachers in at-risk schools are some of the people who can have their loans forgiven, but they must follow detailed procedures and promise to work for a designated number of years. Some generous employers may also offer assistance with loan payments.
Paying off student loans takes dedication and persistence. But so did making it through four or more years of school. So apply yourself to the job of getting out of student debt. You could save yourself thousands of dollars in interest and gain pride in your second biggest accomplishment.