Student Debt Best Practices
If you went to college or some other form of higher education, odds are you have student loan debt. Paying off your student debt may seem like a long, never-ending endeavor, but with some money management skills you can minimize your debt and pay it off faster. Here are some best tips to practice when working to pay off your student debt.
Know Your Loan
Before you make any payments, you need to know what kind of loan you have and how much you owe.
First, figure out which of your loans are federal or private. Federal loans and private loans have major differences in regards to rule backings, interest rates, payment plans, etc. It’s important to know which you have and to understand the differences between them to make smart future payment decisions about your loan.
After you’re familiar with your loan type, find the minimum monthly payment, interest rate, and loan term for each loan. Once you know all these details, use a student loan calculator to see how long it will take you to pay off each loan. Knowing this will help you budget correctly and pick the right repayment plan for you.
Create a Budget
Budgeting is the best way to become financially free. It can help you understand your debt and visualize your current financial state. Document your income and expenses to see where you can save money. After figuring out your immediate expenses, you can set aside money to help pay off your loan.
Set short and long-term financial goals. This will give you a clear path to follow and keep you motivated to pay off your debt. More importantly, it will help you to prioritize where your money is spent.
Make sure to save any found money. This could be money from tax refunds, rebates, bonuses, or cash gifts. Saving any extra source of income will help you pay off your loans and any other debt you may have.
Be sure to revisit and update your budget so you can see exactly where your money is going and make any adjustments when necessary.
Pay in the Early Years
Paying off student loans can be hard to do right after college. Unless you have severe credit card debt, it is wise to pay off as much of your student loans as soon as possible.
Student loans are similar to auto or home loans in that they gain interest over time. The less you pay on your loan, the more interest you will accumulate and the longer it will take for you to be financially free.
If you are currently in college, consider getting a job or internship to save money. If you have a stable income and good credit, consider refinancing your student loans. Refinancing is a great way to save money and pay off your debt if you have the financial health to do so.
Simply having student debt doesn’t hinder your credit score – it’s not paying on time or in full that will.
Even if you are an organized person that is always on time and meets deadlines, mistakes happen. If you miss a payment, lenders can charge a late fee as soon as you miss it, but more importantly, it can negatively affect your credit score.
Although fees may be given, you can still save your credit score if you miss your due date. Federal loan lenders wait 90 days to report a late payment, and most private lenders wait around 30 days. If you make your payment before your lender reports it, your credit score will most likely not be affected.
However, if the lender reports your payment as late, also known as a delinquency, it will stay on your credit report for seven years. The more late payments reported, along with the longer you wait to make a missed payment, the more damage you will do to your credit score.
It may not seem like a big deal, but having bad credit can make big purchases, opening other lines of credit, and even finding rental properties difficult. Loans like mortgages will require certain credit score ranges and give higher interest rates to people with lower credit scores. To avoid even more financial stress, it’s best to set up automatic payments. This way you will not have to worry about missing payments and damaging your credit.
“Get really clear about why do I need this degree? Or what do I want to use it for? So then I can decide if spending that money is a reasonable expenditure.“
Make Extra Payments
One of the best practices for paying off student debt is paying more than the minimum. Consistently paying extra means the less interest you owe and the sooner you will be student debt-free.
Paying more than the minimum doesn’t mean you have to pay double the required payment. Just putting an extra $20 in your auto payments can be quite beneficial. The key is to make healthy money choices. Pay as much as you can, but make sure you still have money for any other debts and necessary expenses.
Sometimes lenders will take extra payments and apply them to the next month’s payment. Although this won’t hurt you, it won’t help you pay off your debt faster. So before you pay extra, make sure to tell your lender to apply overpayments to your current balance to get all the right benefits.
Consider Forgiveness Programs
Although you should not bank on this, you can apply for loan forgiveness to lessen your debt. The only loans that qualify for loan forgiveness are Federal Direct Loans, Federal Family Education Loans, and Perkins Loans.
There are many loan forgiveness programs you can apply for. However, each has a set of qualifications that only make a few people eligible. If you work in education, health care, or public service it may be wise to look into these programs. If you are eligible, this can be a great way to minimize or relinquish you from your student debt.
The Road to Financial Freedom
Paying off student debt can seem like a lost cause at times. Following these tips will help ease the burden and allow you to work towards being debt-free. For more information on how to become financially free, check out a Guide to a Healthy Relationship with Money for tips on how to improve your financial success.