February 9, 2017
Dear Matt: I recently graduated from college and it’s almost time to start paying back my student loans. I have over $50,000 in student loan debt, and it seems almost overwhelming to have to pay all this back, especially with many other expenses. Fortunately I have landed a job, and am making a decent salary. That helps, but I’m feeling financial pressure to make it all work. Do you have any tips or resources for people like me seeking advice on how to manage the overwhelming burden of paying back student loans/debt?
Matt: I cringed when I heard the numbers. My niece is in her second year of college and has already accumulated $65,000 in student loan debt. “But it’s totally worth it,” she said, before leaving for London for a month-long school-sponsored education program. She’s right in the fact that a college degree, and the experiences that come with it, are worth it. But it’s painful to see so many young students accrue so much debt. She may realize that as well – after one year at a private school, she’s now going to a public university and back living at home as a way to cut costs.
Her story reminded me of my cousin who accumulated over $120,000 in student loan debt. Her first job was for a large financial institution (her degree was in education, from a private school). Her boss at that job, only a few years older, didn’t go to college, had no student loan debt, and made more money than her. Those two eventually got married – which is how I know this story – but that in itself is a whole other story.
Why do I tell these tales? Because these are common stories for today’s college student and college graduate. And while it doesn’t change this reader’s situation – or pay their debt, any recent college graduate with student debt should understand that you are not alone, and that there are resources out there to help you.
In fact, nearly seven in 10 seniors (68%) who graduated from public and nonprofit colleges in 2015 had student loan debt, with an average of $30,100 per borrower, according to the Institute for College Access & Success.
When I paid back my student loans after graduating from Minnesota State University, Mankato (Mankato State University back then), I did it without a plan, or real understanding of the options available to me. I simply read the letters sent to me, submitted the pay stub and check to the loan servicing company (no online payments back then) each month, and cringed as it seemed like a lingering debt that would never go away.
Don’t be like me. Don’t go about paying back student loan debt without a plan. Take advantage of the many online resources available, and heed advice from financial experts like Phil Schuman, Director of Financial Literacy at Indiana University (IU). Schuman unleashed multiple financial literacy initiatives in the past four years, and reduced undergraduate student borrowing across IU by nearly 14 percent – which comes out to a whopping savings of $78 million, since introducing his financial literacy efforts.
It’s tough to start one’s professional career drowning in debt. But don’t let that debt dominate your life.
“While it’s extremely important that you get rid of (student loans) as fast as you possibly can, make sure you don’t do it at the expense of your wellness,” says Schuman. “If there are things in life that are important to you and keep you going, even if they cost a little bit of money, make sure to keep them as part of your life. Having those things in your life will help keep you motivated and energized to continue tackling your student debt.”
Katie Ross, Education and Development Manager for the American Consumer Credit Counseling, an organization that provides information and guidance on issues such as identity theft, credit, debt and budgeting, agrees.
“There is a stigma about being in debt that causes many borrowers to prioritize eliminating student loan debt over other financial objectives like saving for a house or for retirement,” says Ross. “If possible, do not neglect saving for retirement just to expedite student loan repayment.”
I get it – it’s hard to think about saving for retirement – let alone making monthly rent payments, car payments, or even going out on the weekend – when that large monthly loan payment looming. But it can be, and will be done. You will get out of debt. But it’s not easy, and takes planning, preparation and diligence.
Get out of student debt by following these tips:
- Take ownership of your debt: “You need to realize that you are in charge of how quickly your debt can go away,” says Schuman. “Don’t allow yourself to blame others for your debt being there or hope that others will help you get rid of it. Own your debt and get rid of it as fast as possible.”
Set a “done with debt” date and then do everything you possible can to meet it.
- Create an efficient budget:A carefully planned budget will help any individual gain a better understanding of their financial outlook and how they’ll need to adjust their lifestyle to afford to live, save, and pay off debt. “Knowing how much money you have to dedicate to paying off students loans and what expenses can be reduced is the best place to start when trying to figure out how to eliminate student loan debt quickly,” says Ross.
- Calculate payments:At StudentLoans.gov, borrowers can access a repayment estimator that will help them understand how much their monthly payments will be under different repayment plans. Because the site accesses borrowers’ specific student loan files, repayment calculators can show each graduate repayment details that are unique to their specific loans. This will also let borrowers see what the interest rates are on their different loans and what they will pay in interest using different repayment options.
- Worry about the amounts, not the interest rates: “Before I explain myself I do want to assure you that I do understand math,” jokes Schuman. It might seem contradictory to not focus on the interest rates of a debt, but paying off debt is more a matter of psychology than it is math, he says. In the case of focusing on paying off debts by interest rates, while it will allow you to pay less in interest when all is said and done it is difficult to tackle debt when you don’t see the numbers go down fast. If you pay off your debts by prioritizing the one with the lowest balance – and still paying the minimums on all other debts – you’ll see your number of debts go down faster, which will motivate you to keep tackling your debt. Once you get rid of the first debt, apply the money you used to pay off that debt and apply it to the one that now has the lowest balance, and so on.
- Understand relief eligibility: While logged into the Federal Student Aid website, borrowers should read up on different relief programs that are available to military personnel, public servants, persons with disabilities, and other individuals, points out Ross. The details of the programs are important because borrowers might already be eligible or can become eligible based on the industry they enter upon joining the workforce. Some may qualify to have their loans discharged or forgiven after just 10 years of on-time payments.
- Choose a loan repayment plan:
Those who can afford it and are interested in getting out of debt quickly should choose whichever plan has the highest payments and the shortest repayment period. Anyone in any plan can accelerate their repayment by paying a little more than their minimum payment each month. This will save the most in interest over the life of the loans.
- Make one extra monthly payment per year: Making 13 payments a year instead of 12 can help save big on interest. Learn more about that strategy in the article Paying off Student Loan Debt: 5 Tips.
- Contact the loan servicing company: Graduates and other borrowers should know which company is handling their student loan debt. Student loan repayment and billing for some borrowers is not handled by the government itself but by a loan servicing company. Getting in touch with the loan servicing company will help borrowers update their contact info, learn about potential ways to reduce interest, and get up-to-date details about how much they still owe.
- Enroll in autopay: If borrowers are financially able, the easiest way to ensure that their loans are taken care of is to enroll in a service that automatically deducts their loan payment from their bank account each month. Plus, this protects grads from missing payments and hurting their credit, says Ross.
- Be cautious about refinancing student loans: Many new grads obsess over their debt and paying it off as quickly as possible, says Ross. Know that refinancing comes with risks like losing the benefits offered with federal student loans. Also, your credit need to be in really good shape in order to refinance and get a good interest rate. If you do choose to refinance, be careful about choosing a fixed or variable interest rate. Interest rates, which are set by the Federal Reserve, are likely to increase, which could be harmful to your debt repayment plans, says Ross. Be sure to carefully read all terms and conditions when refinancing.
- Set up an emergency fund: Don’t accelerate payments on deductible student loan debt until you’ve set aside six to 12 months of “emergency” money, says Beth Walker, CCPS, CRPC®, a Partner and Personal CFO for The Wealth Consulting Group and founder of Center for College Solutions, a resource for families and college students whose goal is to reduce the stress – and costs of attending college.“This seems counterintuitive but student loan debt is still relatively ‘cheap’ and having liquidity, use and control of capital is the foundation to a strong financial future,” says Walker.
- Find a way to focus on the future: This may seem years away, but remember this tip: Once the loans are paid off, immediately direct the monthly loan payment toward a long-term savings program. “You’ve learned to live without using that cash flow in your current lifestyle up to this point, so take advantage of that fact and fund your future lifestyle with the equivalent of your education loan payments,” says Walker.
So you have student loan debt. That’s reality. Don’t let it get you down. Develop a plan for success. And heed the advice from experts. By reading this article you’ve already received advice from a financial literacy expert, a manager from a consumer credit counseling agency, and a financial planning expert who has a decade of experience helping families and individuals pay off student debt.
That’s a good start. That’s more than I ever did – and more than most people do.
Keep it up and you will dominate your student debt.