Student loan debt continues to climb to significant amounts in recent years, with some students taking on as much as $34,000. These sums can strain student budgets after graduation if they aren't managed carefully. In this article, we'll cover six practical ways students and new graduates can avoid paying more than is necessary and become debt-free faster.
Assess Your Total Debt
Many college students understandably want to focus on their education and future careers while they're in school and deal with financial issues after they graduate. It's important, however, to stay on top of your debt situation before you graduate and make plans for repaying it. When you assess your total debt, you'll need to factor in other forms of debt like credit cards, auto loans, and personal loans.
You won't have a clear picture of your financial situation at graduation if you only think about the payments you'll make on your student loans. There are handy tools like a Financial Goal Calculator that can help you plan your monthly payments ahead of time.
Start Paying Interest Before Graduation
Many student loans give you the option of making payments before you graduate. If you're able to do this, it makes sense to take advantage of it. A lower principal amount at graduation will reduce interest charges in the future, which in the long run shortens the length of the loans.
Make Payments During the Grace Period
The same principle holds true for grace periods. Many students take advantage of student loan grace periods after graduation to stretch their finances during their job hunt. It's convenient that student loans have grace periods if your finances are tight, but it's smarter to have a temporary income while you look for a professional salary and start making payments immediately.
Rank Each Loan by Interest Rate
Another strategy is to pay down the loans with the highest interest rates first if you have several at different rates. Eliminating the highest rate loans reduces the overall amount of interest you'll need to pay in total and shorten the time it takes to wipe out the principal balance. If you need to make payments on each loan every month, weight your payments to the higher interest loans by paying more than the minimum.
Create a Budget
Tight finances usually require creating a budget to stay focused and disciplined with your money each month. If you want to aggressively pay down your student debt, a budget can also be a way to find savings in your everyday expenses. Simple things like changing how often you eat out or cutting subscriptions you aren't using can free up hundreds of dollars a month. That money will shorten the length of your student loans when you make extra payments with it.
Make Extra Payments
Once you're working in your field and making regular payments on your student debt, extra payments will shorten the length of your loans even if you only pay a little more. If you find yourself with a large sum, don't hesitate to pay down your loans with it. You'll lower the total interest payments dramatically by eliminating a large part of the principal early.
Share Housing Costs
If you find yourself hard pressed to keep up with your student loan payments or can't find the means to pay them off as quickly as you'd like, there are creative ways to lower your overall living costs. You look for a living arrangement that shares the rent or mortgage payments between two or more people. These people might be family or friends in a similar situation. Since can be about 30-40% of a household's monthly expenses, you'll free up a substantial amount by cutting it in half or splitting it three ways.
The Bottom Line
Many Americans file for Bankruptcy and more and more Canadians are filing Consumer Proposals because of mounting debt that starts in their school years. The key to eliminating debt is paying as much as possible early on to avoid letting debts accumulate. Many of the tips above are different ways to reach this essential goal. The trick is to pay off the principal ahead of schedule to avoid paying the total amount of interest that will be charged if you simply pay the minimum each month. If you can find ways to reduce your monthly expenses and increase your income, you'll have the extra cash needed to pay your loans off faster.
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