Student debts are no joke. In fact, it hit a record high of more than $ 1.5 trillion, according to the Federal Reserve. Only mortgage debt is bigger in the US
When you are among the millions of people who get into trouble because of their college debt, you may find yourself on a confusing and intimidating journey – but we’ve rounded up some resources to help you pay off your loans and get your funds back with freedom .
First of all, you should pay attention to the loan repayment schedule, which determines how much of the payments will go to interest and how much to the principal balance.
While you can pay the same amount for a loan every month, in the beginning a larger part of the money is used for the interest; As the loan ages, more money is used on the balance.
To see exactly how much, and to avoid surprises, you want to view an amortization schedule that tells you in detail, for each payment period, which part of your payment will be used as interest and which will be used as amortization. For student loans, you’ll need to ask your loan service provider to show you one.
What You Should Know About Your Student Loans
Regardless of your balance and how it got there, getting rid of student debt will require a solid strategy. The first step is to know what you are dealing with.
Your loans are either private or government; The majority of the student debt is held by the federal government.
According to the Department of Education, federal student loans always have a fixed interest rate between 2.75% and 5.30%. Private loans, on the other hand, are granted by banks and credit unions, among others, in contrast to the state. Interest rates can vary and can be higher or lower than the federal student loan.
If you have a federal student loan, know that your payments are frozen for the remainder of 2020. The CARES bill, passed in March after the outbreak of the pandemic, provided for an interest-free suspension of federal student loan repayments, and that provision was extended through August to the end of the year.
If you can still make payments for your federal loan during this period, you can use this catch-up opportunity. The interest freeze means that whatever you pay now will directly reduce the principal. This in turn reduces the amount you pay interest.
“I advised my customers who can still afford to keep paying their student loans not to stop paying,” says Paul Fenner, CFP, financial advisor and founder of TAMMA Capital in Commerce Township, Mich. “People are often tries to stop paying because they think they could save the payment for other financial goals, but (they) don’t have the discipline to do so, ”adds Fenner.
“If your job is in any way uncertain, store the money,” said Ryan Frailich, CFP, a financial advisor and founder of Deliberate Finances in New Orleans. But if you have no other non-mortgage debt, already have adequate emergency funds on hand, and your job is safe, just pay off your student loans, says Frailich: “The freedom of thought to deal with it is” worth it. “
Federal loans vs. private loans
Also note that federal loans often have more payment options than private ones.
For example, you might be eligible for the Public Service Loan Program. This program pays the balance of some types of federal student loans, but only after you have made 120 qualifying monthly payments under one of the qualifying repayment plans. You must also work full-time for a qualified employer – either the government (federal, state, local, or tribal organization) or a nonprofit organization.
If you have a high interest rate personal loan, you can consider refinancing – that is, getting a new loan with a lower interest rate. This would lower your monthly payments and potentially save you money over time.
Refinancing makes sense if you have a relatively high credit rating and can save a significant amount on your loan payments. While there isn’t a hard and fast rule of good credit, you definitely want your credit score over 670 in order to get an attractive interest rate.
Look at your budget
Once you have your balance and interest rate under control, it is time to create a payout plan.
First things first, you should go through your budget article by article and see if there are any expenses that you can cut back and redirect onto your loan payments.
Ask your student loan provider to send you a repayment schedule detailing how much of each payment will be used for the interest.
Because of the way the amortization works, the best way to drain your balance is to make additional payments in addition to your minimum amount due. This extra money will be used directly to reduce your balance. (Make sure to let your loan service provider know that you would like the extra to be directed to the ordering party.)
“Minimum payments will usually not get you where you want to go. You need to have a strategy in place to get extra money, even if it’s only $ 20, ”says Kendall Philbrick, a personal finance blogger known at @babeonabudgetblog.
This approach of cutting volunteer spending and putting more money into monthly payments helped NextAdvisor employee Bernadette Joy and her husband repay more than $ 25,000 on their student loans.
“It is important to note that having debt – no matter how it arose – is not a moral or social failure. It’s a stressful part of life, but it can be managed, ”Joy told us.
In addition to cutting back on discretionary spending, Joy found additional sources of income to leverage, like renting a room in her home.
What if you have multiple student loans?
When you have multiple balances to worry about, managing those payments can be overwhelming.
For clarity, consider two of the most popular withdrawal strategies: the debt snowball and the debt avalanche.
The debt snowball method encourages minimum payments to be made on all debts except the account with the lowest balance. With the latter, you make higher payments than the minimum. Once these debts are paid off, your monthly payments will be used for the next smallest debt. When you see your accounts go to zero thanks to your work, it motivates you to tackle your biggest balances.
Conversely, the avalanche method encourages focus first on the account with the highest APR or percentage. That’s the one you’ll spend more money on while making minimal payments on the other accounts. As soon as this is paid off, concentrate on the next higher interest account. This method will save you the most money on interest fees over time.
There is also the so-called landslide method, in which you first pay out the most recent account. This can be more beneficial to your credit score as credit bureaus give more weight to the payments you make on the most recently opened accounts.
Mandy Velez used the snowball method to pay off more than $ 100,000 in student loans after graduating from the University of Pittsburgh in 2013.
“I think a payoff plan that works for you is the best plan of attack followed by a budget,” said Velez, an assistant editor-in-chief at The Daily Beast who went viral on Instagram last year for her student loan payment
In the end, the snowball method helped her “feel motivated to pay and like I had a plan to attack”. Velez always treated her loan payments like an invoice and paid them like a rent. In her words it was a “non-negotiable” one.
Philbrick, on the other hand, used the avalanche method. She adds, “In general, conquering student loans is sitting down, getting organized, figuring out exactly what you owe as well as your interest rates, and starting from there.”
Above all, however, she recommends anyone paying off student loans to find out what the monthly interest rates are, because that adds up significantly over time.
Be diligent and stick to it
Once you have decided how to bring these loans down to $ 0, it is a good idea to mentally prepare for the path ahead of you.
By signing up for auto-payment or paying your loans bi-weekly instead of monthly, you can create habits that encourage you to be proactive with debt payments.
That may mean saying no to dinner or happy hours with friends every now and then – but that doesn’t mean it isn’t important to indulge yourself every now and then.
“If you’re too restrictive, it won’t work,” says Philbrick. “You have to come up with something that is sustainable. It’s so important to raise money in your budget for things that you love, whether it’s happy hour or a friend’s birthday. You have to plan that in your budget. “
It can’t be glossed over that paying back your student loan debt is an uphill battle. But with these strategies in mind, you’ll be able to cross the finish line before you know it.
Editor’s note: An earlier version of this story cited the case of a student loan borrower who claimed to owe a balance of $ 76,000 even after paying $ 120,000 on a $ 80,000 loan. On further review, we were unable to confirm the details of your account, so we’ve removed references to it from this story.