Student Loan Debt

How to Handle Student Loan Debt

You just graduated college and you’re ready to embark upon your new career path. There’s only one problem: you’re carrying a weighty burden in the form of significant student loan debt. How can you make a fresh start when you have to keep looking back at all the money you owe from your college days? Especially for students who land jobs or set down roots in big, expensive cities, this question can be a major source of stress. College debt can feel like a barrier to future growth and success, or like an albatross that you will be forced to wear around your neck forever. The good news is that paying off student loan debt—and doing so faster than you expect—is possible. Read on to learn more.

Step 1: Don’t panic

Right now, it probably feels like you are the only person facing down a mountain of student loan debt. You look on social media and see all your high school and college friends gushing about their new jobs and overnight success. No one is talking about debt.

In all likelihood, though, no one is talking about debt because debt is a scary, uncomfortable thing to acknowledge. That doesn’t mean it isn’t a factor in other people’s lives. On the contrary, 69 percent of all college students in the class of 2018 took out either private or public student loans to pay for school. The average debt for that 69 percent subset of the college population was $29,800. Simplified, those statistics mean that seven out of 10 graduates from last year exited college with roughly $30,000 in debt. Most of your friends, in other words, are in the same boat as you.

Bottom line: don’t panic. You aren’t the first person to cross this river, nor will you be the last. At this point, the debt is there and there’s no going back in time and tweaking your strategy. The only thing to do is look forward and figure out how you are going to pay back all that money (plus interest) without derailing the rest of your life.

Step 2: Review your debt

Automatically, you will be enrolled in a student loan repayment program for the loans that you have in your name. You will start making payments on your loans more or less as soon as your finish up college. Rather than just sitting around and waiting for a bill, though, you should be proactive in your final months of college and review the debt that you have. How much is there? Is it split across multiple loans or lenders, or consolidated into a single payment? What type of repayment plan are you enrolled in? What are the interest rates? How big are your monthly payments going to be? Answering these questions will give you insight into how to start paying off your loans in a smart, strategic manner.

Step 3: Select repayment plans that make sense for you

There are a few different types of student loan repayment programs. Depending on your situation, one might be more appealing to you than the others. Here are a few examples of types of repayment plans that exist:

• Standard: The simplest type of repayment plan. Your debt will be broken into fixed monthly payments, based on what you owe, and you will proceed to pay off your debt over the course of a 10-year term.

• Income-Based Repayment (IBR): IBR plans allow you to cap your monthly repayments at a certain percentage of your discretionary income (usually 10 or 15 percent). After 20-25 years of payments under IBR, you can actually get your loans forgiven—though the forgiven balance will be considered as taxable income if and when this happens. There are income-level requirements to be eligible for this type of plan.

• Public Service Loan Forgiveness (PSLF): If you work for the government (whether at the local, state, or federal level), you may be eligible for a PSLF program. With PSLF, you can get 100 percent student loan forgiveness after you have worked in the public sector for 10 years. Individuals with 10 years spent working for a nonprofit organization may also be eligible.

• Pay As You Earn (PAYE): Similar to an IBR plan, PAYE caps your monthly loan payments at 10 percent of your discretionary income and renders remaining balances eligible for loan forgiveness after 20 years. As with IBR, there are income requirements that you must meet to be eligible for a PAYE plan.

In addition to these repayment plans, there are also repayment or loan forgiveness programs in place specifically for individuals in certain career paths. Examples include teachers, nurses, doctors, or lawyers. Click here to read more about different repayment programs.

Of course, some of the most famous repayment programs are the ones that exist through the military. If you decide to serve the United States as a part of the Army, the Air Force, or another branch of the United States Armed Forces, then student loan forgiveness is a notable perk. There are also loan forgiveness programs through volunteer organizations like the Peace Corps and AmeriCorps.

Step 4: Repay faster (where possible)

Sticking with your repayment plan and making payments on time will help improve your credit and slowly but surely diminish the debt you owe. Where possible, though, making extra payments on your loans can reap big benefits. The faster you pay off your student loan debt, the less interest you end up paying in the long run. You also stand a chance to get that debt off your plate months or years early, which can open up your discretionary income to be spent or saved elsewhere—whether on a vacation, a first house, or college planning for your kids.

Ideally, try to funnel as much of your “disposable income” into your student loans as possible. Figure out how much money you need each month to handle expenses like rent, utilities, groceries, and a little extra. And of course, set aside the money that you already have going toward your loans. With whatever’s left, consider making extra payments on your student loans. Sure, it might sound more appealing right now to go spend that money on a fun night out with friends. But getting out from under the burden of your student loans will feel better in the long run, and you will spend less in interest if you can pay off those loans ahead of time.

Step 5: Know what to repay first

If you have multiple student loans in your name, there are two basic approaches you can take as you try to pay them off early:

Option 1 is to pay off the loan with the highest interest rate first. This strategy is smart because a huge amount of what you are paying each month is interest rather than principal. Getting those high-interest-rate loans off your plate will drastically cut down on what you are paying each month. Using the extra money, you can target the loan with the next highest interest rate, and so on and so forth. In general, this strategy for paying off student loans will mean that you end up paying less in the grand scheme of things, because you minimize the amount of time that the interest has to accrue.

Option 2 is to pay off your smallest loans first and work your way up from there. This strategy won’t deliver the cost-savings benefits of the first option, but it can be a big boost in confidence and peace of mind for some students. Even paying off a small loan is an accomplishment. It feels good knowing that any of your college debt is gone. Starting with the smallest, most manageable piece of your student loan debt is kind of like beginning your work day with the easiest task. You get a rush of accomplishment when you get that first thing done, even if it was the easiest thing on your plate. Paying off that first loan will feel similarly wonderful, and will offer some assurance that there is light at the end of the tunnel. Plus, having fewer loan payments to make each month is just simpler and less stressful.

Whichever option you choose, you will likely want to pay off your private student loans first (if you have them). Private loans usually have higher interest rates and stricter terms for repayment. You might not even be able to refinance your private loans, and you’ll be hard-pressed to negotiate lower monthly payments if you ever need them. Federal loans are a bit more flexible and typically have the lower interest rates.

Also, remember that no matter what strategy you decide to take with your student loan debt, you need to keep up with your minimum payments on all your loans. Even if you decide to make extra payments on one or two loans, that doesn’t mean the others go away. Figure those minimum payments into your budget as you start trying to figure out how much extra money you can spare for additional payments.

Step 6: Look for help

It’s okay, at any point in this process, to ask for help. Sit down with a financial advisor to find out if there is any potential for refinancing your loans or consolidating them into one monthly payment. Ask your employer if they offer any sort of student loan repayment benefit. Certainly, if you are looking for a job, keep an eye out for companies that do provide loan repayment perks. According to this article from Forbes, such benefits are becoming more common—especially at bigger companies. There is a growing brand called Gradifi that focuses specifically on administering employment benefits for student loan repayment, student loan refinancing, and even college savings. Employers understand what today’s graduates are going through and are taking steps to offer a helping hand.

Student loan debt is a growing crisis in the United States. As this issue becomes a battleground for politicians and policymakers, however, students and graduates are still busy trying to pick up the pieces. If you recently graduated and have debt, using the strategies discussed in this post will help you navigate toward a more financially unencumbered future.

If you are just entering college, though, you might start thinking about loans and debt now, before you make any sort of financial commitment. College today is too expensive to go in without a career plan in mind, or to enroll without a thought spared for potential return on investment. At Right Path College & Career Planning, we help students and their families ask these difficult questions with services like our career-interest match. We work with students in Traverse City, Michigan and Waxhaw, North Carolina to find and apply for scholarship opportunities that can reduce the burden of college expense.

To learn more about what we can do to help, contact us today.