Extinguishing your student loans - Financial Literacy

Extinguishing your student loans

Before reducing your student loan debts, naturally, it is best not to incur an imprudent amount of debt in the first place. There are too many student loan horror stories already of colossal debt that can never be paid off, or having your Social Security Retirement benefits garnished for decades-old student loans that were ignored. There are countless books, publications, courses, advisors, and online resources for tuition assistance, scholarships, grants, and other financial aid. Plus, there are directories of tuition-free colleges and tuition waiver programs from state universities across the country. If you do choose to use student loans, here are two rules to follow to avoid building up an overwhelming level of debt: Never borrow any money in the first year of school and never borrow more than 75% of the annual salary you expect with your degree from your school. There are nuances for special situations (for example, a medical degree where your expecting income will grow sharply over time, however there are debt limits for every degree, including medical and law degrees.) So you must budget your degree and expected earnings to avoid being saddled with far too much debt for your degree.

Whether you have a small or colossal student debt load, the big question is, “How do I get out of this as fast as possible?” Below are tasks, assignments, and goals to make this happen.

  1. Administration
  • Get all of your loan contracts to learn the exact details: rate, balance, due date, consequences for late payment, possible pre-payment penalties, and deferment rules. And thoroughly understand your monthly statements. (Some lenders offer a slight rate discount if you setup automatic payments, choose paperless billing, or adding a savings account at the bank).
  • Keep your contact information current with all of your lenders and/or servicers so you don’t miss important notices.
  • Understand and confirm payments are being made correctly. For example, you may intend to make an additional principal payment, but the lender may process that as a payment for the following month instead.
  • Follow the IRS guidelines for deducting the interest on your income taxes.
  1. Loan Balance Forgiveness, Discharge, Cancellation, Waiver, etc.
  • Many companies and non-profits offer some form of student loan forgiveness if you agree to work for a certain number of years; and some federal student loans qualify for cancellation through public service.
  • Some special situations allow for a loan balance discharge; for example: veterans, disabled, teachers, and sometimes withdrawing from school without a degree. There are online databases that track many types of student loan forgiveness programs.
  1. Loan Terms
  • It may be beneficial to refinance to lower interest rates, consolidate loans, or get a longer repayment term. There are many payment plans: Standard, Extended, Graduated, Income-Contingent, and Pay As You Earn – the best plan offers you the option of a small monthly payment. This is beneficial in the event something happens, plus it allows you the most freedom to target a particular loan with extra principal payments.
  • To evaluate any refinancing, you need to first list out the loan balances, rates, and minimum payments so you can employ the April 8th blog post tactic titled, “How to choose which debt to attack.” Then map out your payment schedule to determine the date at which all of your loans will all be paid off.
  1. Decide How Quickly You Want to Be Free – Maximize Extra Principal Payments
  • You can make minimum payments and take a couple decades to pay your loans off, but this extracts the most interest charges from your income – money that could be used for your lifestyle spending, savings, or investing. Paying for interest represents money that you earned that you can never spend, it was pre-spent. So minimizing interest charges by paying down the principal balance on your loans is an important financial goal.
  • So how aggressive with extra principal payments do you want to go? Live with parents, relatives, have lots of roommates to split costs; cut your budget to the bone; pick-up a side gig; apply 100% of any raise to principal payments; eliminate recurring monthly charge plans for movies, cellphones, gaming; apply any unexpected income, bonus, or tax refund to your principal balance.
  1. Begin Payments Immediately
  • Some students get a head start by making loan payments long before they graduate with extra money or part-time jobs. The faster you can hit principal payments, the faster you stop the clock on interest charges it is accruing. Tiny payments while you’re in school add up over time. You do not have to wait the 4-6 months after you graduate to begin making payments.
  • Some graduates make two half-payments a month instead of one at the end. Making these bi-weekly payments will slightly reduce the interest charge each month, but you have to check with your lender to determine if they permit this type of payment (some will allow weekly payments which is even better).
  1. Other Considerations
  • Since you’re trying to get yourself out of debt, do not incur additional debts with credit card balances for which you’ll be charged interest.
  • Don’t sink money into a new car, keep your junker or replace it with an affordable used car without a loan.
  • Track your loan balances each month to watch them melt, keeping your motivation high and momentum going to extinguish all of them.
  • Do not make extra principal payments until you have $1,000 set aside in an emergency fund to give you some breathing room if there is an unexpected expense.

If I had included website links on this post, it would be 16 pages long. Plus, they change as companies and rules change. But expert websites are easy to find, for example, if you’re unsure about consolidation? Look up, “student loan consolidation tips.” One great website resource to start with is StudentLoanHero.com that offers a lot of information and links to others.

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