Student loan debt continues to grow and is currently at $1.5 TRILLION…… Let’s pause there for a moment.  To put that number in perspective that is about how much currency is currently in circulation.  It is equivalent to a million million.  THAT’S A LOT OF MONEY! Imagine the interest being paid on that amount of debt. I only bring up the interest being paid to emphasize the importance of managing student loan debt properly.

The student loan debt crisis is straining the financial outlook of many households.  There are many factors contributing to the negative financial outlook for student loan borrowers but let’s focus on what impacts the majority of borrowers- borrowing without a plan AND the lack of understanding of the long-term financial impact. 

To help illustrate the long-term financial impact, imagine the scenario below:

Jessie attended a public in state 4-year institution.  Her yearly tuition cost including living expenses was about $25,000. Jessie had to borrow all 4 years and owed about $100,000 at 7% interest when she walked across the stage at graduation. 

Luckily for Jessie, she had a job lined up right after graduation with a starting salary of $30,000 a year.   After her fixed expense obligations, Jessie had about $650/month left to contribute towards her student loan debt repayment.   At $650/month, it will take her about 33 years to pay it off and it will cost her an additional $156,000 in interest!  After her fixed expenses and her student loan payment, Jessie will be limited in working towards any other financial goals such as contributing to her retirement, establishing an emergency fund and saving up to purchase a home.

While the example above is an extreme case, the impact of student loan debt is putting financial independence at risk and out of reach for many people.  If this is your current reality (or will be soon), here are 5 steps to help you minimize the cost and time of repaying your student loan debt. 

UNDERSTAND YOUR TERMS

Look at your loan documents to identify the interest rate and repayment rules for each loan.  In some cases, there are fees and penalties associated with loans.  Identifying them early is important to avoid an additional cost.

KNOW YOUR NUMBERS

• Calculate the total amount of your student loans.  Knowing what you are facing is important in setting up the right strategy.
• Identify the minimum monthly payment on each student loan.  This step is important in determining whether you have enough to cover your payments.
• Calculate your fixed monthly expenses.  This will help determine how much of your income is available to repay your loans.

KNOW YOUR OPTIONS

There are several options available when it comes to repaying your federal student loans, a few are listed below.  These options don’t apply to Private student loans as they generally have less options when it comes to repayment.

• Debt forgiveness programs– Certain public service jobs may qualify for loan forgiveness after a certain number of payments are made. Visit the U.S. Dept of Ed for more information.
• Income based repayment- This option uses your income to determine the minimum monthly payment, which is usually no more than 20% of your adjusted gross income for 25 years.  Any balance after 25 years may be forgiven.
• Graduated repayment– This plan starts with low monthly payments and increases them every 2 years over the life of the loan. It is generally a 10-year loan.
• Defer- This option ceases payments until a future date and is available for those that are not yet employed who meet the government’s deferment qualifications.

DECIDE ON REPAYMENT STRATEGY

Develop a plan– Before your first payment is due come up with a strategy to tackle the loan in the shortest time. Where most people fail is by making payments without coming up with a plan to really reduce the balance.  You will need to refer to the KNOW YOUR NUMBERS section to determine which option is best.

Sacrifice NOW– Postpone big purchases, reduce other expenses and focus on applying ALL extra income to student debt repayment.

TRACK YOUR PROGRESS

Establishing a BUDGET and tracking progress against the budget is important to staying focused on eliminating your student debt.  Using an app, spreadsheet or pen and paper are just a few options for tracking.

Know that you are not alone.  Eliminating student debt will not happen overnight and will require PLANNING, STRATEGY and COMMITMENT. If you are overwhelmed at the thought of managing your student loan debt, not sure where to start or just want to reboot your repayment plan, schedule your FREE Money Strategy Consultation.