Let’s be honest – money is a MAJOR cause of frenzy in all our lives! Most of us are trying to earn more, save more, and make what we have go farther. It’s definitely a tough job these days.
For those who have student debt it can be even harder. I am happy to introduce you to Tom from FIREd Up Millennial who is sharing his expertise with us about this topic.
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Student loan debt has become a major problem in the United States, with the national student loan toll at over 1.5 trillion dollars and rising. (1.5 trillion dollars and rising).
This level of student loan debt has prevented many recent college graduates from moving forward in their lives. They often delay major milestones, such as purchasing homes and cars, getting married, having kids, or even saving for retirement.
There is hope for students who are mired in student loan debt, however. While graduating with a substantial amount of loans can feel overwhelming, it is possible to chip away at this debt and even to pay it off quickly, saving money in the process.
Read on to learn the top 7 ways that you can get a handle on your student loan debt and become debt-free.
Set Up a Budget
Many recent college graduates skip this step, and it can come back to bite them. A budget is a necessary feature of any plan to pay off student loans. It allows you to determine exactly how much money you have coming in each month, and how much you are spending. In turn, you can then cut down on unnecessary expenditures, and figure out how much money you can devote to paying off your student loans.
Start by setting up a budget either by hand or by using an app that gathers data from your bank and credit card accounts, and then move forward with a strategy to pay down your loans. (Start by setting up a budget)
Refinance Your Student Loans
Refinancing is probably the top way for borrowers to get ahead on their student loans because it allows them to reduce their interest rate and/or shorten their loan repayment term. Both of these steps can lower the total amount of interest paid on the loan.
The process is straightforward. An applicant, who must have a good credit score and a history of making payments on time, applies for a new loan. This loan will then be used to pay off existing private student loans (and, if desired, federal student loans).
The loan should have a lower interest rate and possibly a shorter term, which means that the borrower will typically save thousands of dollars on the loan and pay it off much sooner than he or she otherwise would.
There are many lenders out there who you may be able to refinance your student loans with. When I was looking into it, I found this guide about refinancing and consolidation to be helpful in finding a lender that fit my needs. This guide about refinancing and consolidation. Many offer similar rates and terms, so it is helpful to see what other benefits they each offer.
Be aware that you will lose access to some federal programs if you refinance your federal student loans such as student loan forgiveness, income-based repayment, and more.
Make Payments Every 2 Weeks
The concept behind this plan is simple: most people are paid every 2 weeks, and can schedule half of their student loan payments to be paid every 2 weeks as well.
While it may not seem like this tactic will help you pay down your student loans, it actually works pretty well to accomplish that goal because you will actually be making 13 full payments in a year (26 bi-weekly payments), that is a full extra payment annually.
In addition, paying every two weeks means that one payment will be applied to the principal earlier, so less interest will be added at the end of the month. Over time, this technique can add up to really make a difference.
Switch Repayment Plans
For people with federal student loans, switching to an income-driven repayment plan can be a great option to lower their payments and be eligible for loan forgiveness. (Income-driven repayment plan) However, borrowers should be aware that these plans require a trade-off: an extension of the loan term to 20 to 25 years. In addition, the amount of the student loan that is forgiven will likely be taxed as income.
There are other options for borrowers, such as public service loan forgiveness, which allow for loan forgiveness after just 10 years. Anyone with federal student loans should contact their student loan servicer to explore options for different repayment plans.
Use the Debt Avalanche Method
The debt avalanche method is considered the best strategy for paying off your debt quickly and paying the least interest. To use it, simply list your student loans in order from the loan with the highest interest rate to the lowest interest rate. Then start devoting all of your extra funds to the student loan with the highest interest rate while making minimum payments on the other loans.
Once that loan is paid off, use the money you were paying towards it to pay off the loan with the next highest interest rate, and so on: the payments will form an “avalanche” and wipe out your debt!
Increase Your Monthly Payment
This tactic may be easier said than done, but it is highly effective, and does not necessarily require putting a lot of extra money towards your student loans. By putting an extra $50 or $100 towards your loans each month – whatever you can afford – you will be making progress on paying down your principal.
When you first graduate, your monthly payments are largely going towards interest on your loans. Paying more than the minimum payment can help you pay off the principal – and get out of debt more quickly.
Invest While Paying Down Debt
While this may not be an option for everyone, investing while paying down your student loan debt is often a smart choice. Student loan debt, particularly on loans offered by the federal government, tends to have a low interest rate.
If your expected return on investment is higher than your student loan interest rate, it makes financial sense to continue investing while paying down your debt. In this manner, you are not putting off your future while paying off your debt.
Using any one of these strategies can help you get a handle on your student loan debt. It can also ensure that you are in a better financial position to follow your dreams – without being hampered by your student loans.
Tom is a new blogger who likes to talk about his personal finances and his ultimate goal of achieving FIRE (financial independence/retire early). Find him on Twitter @FIREdUpMillenn to stay updated with his latest articles and random thoughts.