How to Handle Student Debt
Student debt is a major problem in today’s society. When young adults leave college, they find themselves wholly unable to pay off their student loans and are stuck in a sinkhole of debt. While paying off your loans may seem like a daunting task, it is quite beneficial in the long run and provides you with the financial freedom that you need to pursue your long term goals. According to Forbes, an estimated 44 million people have student loan debt totalling $1.5 trillion dollars. Every year, 1 million students default (declare they are unable to make payments) on student debt, usually because they put off paying their student loans in favor of other debts such as car loans and credit card debt. The average credit score of a defaulter is 550, which is worse than roughly 85% of all Americans. Paying off any kind of debt should be anyone’s top priority, even more than saving for retirement. Student debt has far-reaching effects that can ruin your entire life if you find yourself unable to pay it off.
So how should you go about paying off your student loans? First, make paying them off your highest priority. Cut all of your unnecessary expenses such as your monthly Netflix subscription or your $15 organic peanut butter. Even though they may seem small, they build up and can put you in serious trouble. One thing that you must always remember is that no amount is too small to save. If you buy a $2 cup of coffee from Starbucks every day, that’s over $700 a year, which equates to about 2% of the income of people aged 25 to 34. If you let your spending get out of control, you will not be able to do things that you want later in life and you will find yourself in serious debt.
Small purchases add up, but large purchases can also do a lot of damage to your pocketbook. Big purchases take a huge bite out of your wallet immediately, which can be detrimental. Reducing spending on things such as apartments and cars is vital. Get a roommate, don’t buy the new iPhone right now, buy a used Ferrari instead of a new one. It is important to live below your means and save the luxury for later in life when you have more opportunities available to you. Don’t try to impress all your friends with your gold iPhone case, amaze them with your financial acumen.
While saving money isn’t all that flashy, it puts you in a good position later in life to buy nice things and be well-off. So you’ve started saving all this money, how should you go about paying off your loans? Well, it depends on your situation. The obvious answer is to spend as much as you can to get rid of them. Using this loan calculator, assuming you have $25,000 in student loans with a 6.8% interest rate over a ten year period, you will end up paying around $288 a month, or $34,560 total. If you pay an extra $100 dollars a month, you would pay a total of $31,202, saving over $3,000. Make it a $200 extra monthly payment and you save almost $5,000 over a ten year period. No matter how much extra you spend a month, it will play a big part in the long run. Albert Einstein called compound interest “the eighth wonder of the world” and he was absolutely correct. Compounding interest is what hurts people the most when trying to pay off loans, and it is important to get out ahead of it. You might not be able to make any extra payments, and that’s OK. Just don’t let yourself become overwhelmed by your normal payments, or you will fall into the whirlpool of debt. Not everyone can afford to spend an extra $100 month, but everyone needs to be able to afford their base payment.
Another option that you have is student loan forgiveness, offered by a few loan programs. There are many places that offer student loan forgiveness or cancellation, and many businesses offer programs that help their employees to pay off their loans, such as Aetna.
Don’t be scared by big numbers, just focus on paying off your debts now and save the grandeur for later. You don’t need to make six figures or have a finance degree to effectively pay off student loans, you just need to be responsible with your money. Reducing spending can be hard, but you should push yourself to do it in order to have a better future. Saving a few hundred dollars a month is hugely important and can put you in a better place for years to come. Student debt grows at about the same rate as a 401k (4.5-7% for student loans and 5-8% on 401k’s ), so you should start as early as possible and pay it off as fast as possible. It may seem challenging now, but it will set you up for a bright future!