Going to college is a rite of passage. While no college journey is the same, for many of us it’s a time to move out of our childhood home and learn how to be an adult while expanding our horizons. This newfound sense of freedom and responsibility can contribute to some of the best years of your life.
However, reality often comes to visit after your college days, often in the form of a big fat dose of unfriendly loans to repay. One thing college doesn’t always prepare you for (and is suspiciously clever at disguising) is how exactly to pay this debt off once you’ve finished. In this article, we take you through some tips and tricks to help you manage and pay off your student debt.
Student loans in America
Taking out a student loan for college is a common practice among students. This loan will be taken out before your course of study commences, and will be paid back, with interest, once your education has been completed. It does not need to be paid back during your time as a student.
The first thing to do is fill out the Free Application for Federal Student Aid (FAFSA). The results of your FAFSA will indicate how much financial aid is available to you. It might consist entirely of student loans (which you have to pay back), or it may include scholarships and grants (which you don’t have to pay back).
There are four kinds of federal student loans available. There are:
- Direct subsidized loans: Meant for undergraduate students who require help to cover the cost of their higher education.
- Direct unsubsidized loans: These loans are available to eligible undergraduate, graduate, and professional students, although the eligibility test is not based on financial requirements.
- Direct PLUS loans: These are for graduate and professional students, and parents of dependent undergraduate students. This is to pay for expenses not covered by other kinds of financial aid, but eligibility is based on a credit check.
- Direct consolidation loan: These loans are aimed at people who have amassed a variety of student loans, allowing them to consolidate and simplify them into one loan. (1)
Your student loan is no joking matter and you should make all of your decisions carefully. This is only made clearer by these statistics on the state of student loans in America:
- As of 2018, student debt totaled an eye-watering 1.5 trillion, the second-biggest debt in America (second only to mortgage debt).
- There are roughly 44 million borrowers and their average amount of debt after graduation is around $37,000.
- Student debt default or delinquency (90+ days delinquent) sits between 10-11%.
- Two million borrowers have debt higher than $100,000 and over 20% of those have debt over $200,000. (2)
Evidently, student debt is a huge issue for many Americans. Each quarter sees almost 29 billion added to the total student debt bill, so this is not an issue that looks like it will subside any time soon. Follow these steps below to get your student debt under control. (2)
- Consider refinancing
Student loans can be hard to keep up with, and many begin to consider their options as time goes on. Most loans are fixed to an interest rate of around 5%, but as rates have gone down, new students will enjoy a discount compared to their older peers, with rates now around 2.75% for undergraduates and 4.30% for graduate and professional students. (3)
If looking for a new rate, refinancing is one option where you can consolidate your loans, and opt for a better rate with a different lender. To do this, you will need to investigate which banks to use. There is no shortage of banks offering this product, so doing your research will be essential to ensure you don’t inadvertently find yourself with a worse deal than you had before.
Some considerations include:
- What the new interest rate will be, and whether your monthly repayments and lifespan of the loan will increase.
- Establishment or annual fees that cancel out any savings you thought you were going to have.
- The penalty for delinquency.
If managing your student loan is something you need to learn how to do, one of the first things you should be doing is budgeting. Having a budget in place will mean that you can keep on top of where your money is going, and where exactly you can cut back, or spend more. One way to budget is to think about all the regular expenses you have, and separate them into essential and non-essential categories, then calculate this against your incoming wages.
Things like rent and gas would be under the essential category, while your daily burrito habit would not. Perhaps your Netflix account is essential, but going to bars isn’t. Once you have a grasp on your incoming and outgoing funds, you can make sure you always have your minimum student loan repayment on hand each month.
- Consider your state and university before starting
Many young people are criticized for being short-sighted when it comes to money. It is true that younger people can have a hard time understanding the ultimate repercussions of the debt they take on. Choosing a more competitively priced university can save you thousands off of your overall loan.
College debt tends to be similar across neighboring states. East Coast states like Connecticut, Delaware, and New Hampshire have average rates of student debt well over $30,000. Whereas in western states like Utah, Nevada, and California, student debt ranges between $18-22,000, saving over $10,000 in some instances.
Keeping this in mind will help you manage your student debt once out of college.
- Pay as much as you can, not as little as you can
When assessing the viability of a student loan, the minimum monthly payment figure is what most people focus on. When this looks manageable, we may let out a sigh of relief. In reality, this kind of behavior will only hurt us financially in the long run.
Many loans end up costing around $6-12,000 more than their original amount when paid off over 10 years. That interest is unforgiving, and 10 years can feel like a long time for a fresh graduate. Trying to pay off even 20% extra will save you approximately two years on your loan, and thousands in interest. However, if simply meeting the monthly repayments is difficult, then the next option may be right for you.
- Make compromises
While budgeting alludes to a better understanding of your finances overall, this part relates to the active sacrifices you should be making to get your loan paid off faster. Cut out indulgent late-night takeout, take public transport instead of taxis or rideshares, search for a cheaper home or rent out a spare room (if you have one). Additionally, if you have any possessions lying around you no longer need, Facebook Marketplace or one of the many classifieds websites out there are a great way to acquire some additional funds.
- Don’t sit around waiting for the Democrats to cancel student debt
Since Joe Biden entered office in January, many have been left wondering if his administration is actually going to cancel huge swathes of student debt. Their intention to cancel $10,000 worth of debt sounds promising, but don’t forget that it may also be means-tested (if it goes ahead).
Canceling student debt is not a policy that will be easy to implement, and not just because of the $1.5-7 trillion price tag. This is because many commentators have asserted that cancelling this much debt for the college-educated could be considered unfair by those who didn’t attend college, especially those who found tuition to be prohibitively expensive. (4)
The issue is likely to see additional airtime, but that doesn’t mean it will end up becoming law. Considering that college-educated people tend to be less financially unstable than those without college degrees, this raises questions over the ethics of the initiative. Given that this pits parts of the Democratic coalition against each other, it may end up being a hard sell. (5)
- Get a side hustle
Got a full-time job but not quite earning the kind of cash you need? Sounds like you need a side hustle. This can materialize in a range of different ways. You can:
- Find a part-time job: There is an idea amongst savvy savers out there—the more you work, the less you spend, and the more you save. It’s true. If you get a part-time job in a bar, spending Friday and Saturday nights serving drinks removes you from the seat of the patron, and gets you earning money instead.
- Take surveys: There are numerous platforms that will pay you real money for time spent doing surveys. This is not a “get rich quick” scheme, but can be an easy supplement to your income.
- Rent out your car: If your car is sitting around without being used, you can rent it out to strangers. Modern developments mean that you can do this safely and securely without fear of theft or damage.
Student debt makes up a shocking amount of American debt. For many former students, it can have a huge impact on your finances and wellbeing. By finding clever new ways to make money, staying on top of your finances, and approaching your debt aggressively, you can better manage your student loan debt.
- “Federal student loans for college or career school are an investment in your future.”, Source: https://studentaid.gov/understand-aid/types/loans
- “Student Loan Debt Statistics In 2018: A $1.5 Trillion Crisis”, Source: https://www.forbes.com/sites/zackfriedman/2018/06/13/student-loan-debt-statistics-2018/?sh=7262c3b67310
- “What is the current interest rate for Direct Unsubsidized Loans?”, Source: https://studentaid.gov/help-center/answers/article/what-is-current-interest-rate-for-direct-unsubsidized-loans
- “U.S. student debt has increased by more than 100% over the past 10 years”, Source: https://www.cnbc.com/2020/12/22/us-student-debt-has-increased-by-more-than-100percent-over-past-10-years.html
“Will Biden cancel massive student loan debt? Suddenly, that’s looking doubtful”, Source: https://finance.yahoo.com/news/biden-cancel-50k-student-loan-175000729.html