One of the biggest drags on the economy is the crippling amount of student debt younger generations are carrying. It’s keeping us from taking normal life steps like buying a new car, a home, and starting a family at a younger age. Not only does it slow down the purchase of big items, there is less to spend on going out on the weekends, traveling around the world, and just buying simple extra items throughout your daily life. Think about the compounding effect of those missing dollars in the economy. That may be on a little bigger scale than we want to cover today. If you’re like me, you’re just sick of that extra monthly payment coming out of my checking account. Let’s get more knowledge around student loans and start coming up with a plan.
Knowing your number
When’s the last time you actually looked at your statement from Navient? Do you really know how much you have to pay back? You’re probably thinking, well when I took them out it was only $20-30,000 so it has to be lower than that right? The answer may surprise you, so your first step is simply to find out how much you actually owe.
Understand your repayment plan
There are many ways to pay back your loans, determined by the amount of time you want to pay them back in. The longer you go, the more you will end up paying due to accrued interest over time. That simply means, the longer you take, interest is adding up on top of your principal amount (the amount you originally took out). Choose a repayment plan that will be within your means and not cause you to miss payments. Standard repayment plans typically have you paying back debt in ten years. Graduated plans will allow you to start with lower payments, with increases every two years. The extended plan will typically push things into twenty-year period of repayment. If you can’t find a repayment plan that seems to be low enough, consider applying for an income-based repayment plan. Generally, these will allow you to automatically make payments of 10-15% of your income each month directly to your student loans. While this sounds nice, it can mean that you are repaying your loans for an extended period of your life.
Sometimes you are able to lower your overall repayment amount by refinancing your student debt. This option isn’t available to everyone but can help significantly lower interest payments. Generally speaking, you are taking all of your loans to a company like SoFi, or another refinancing company, where they will consolidate all of your loans, hopefully offer you a lower interest rate, and give you a single payment to make each month. Many companies will allow you to put in your information online to see if it would make sense for you to go down this path.
Making extra payments
Controlling your expenses and savings will help you pay off your loans faster. Set yourself a strict budget, setting aside cash for each expense if you can’t seem to control your card usage. Anytime you can make an extra payment to your student loans, make sure that it is going towards principal amount and not just interest. Some companies require you to select a specific option in your online profile to designate where extra payments go. Think about you did with your last tax return. What about that bonus from work? Are you working a side hustle? Put any extra money coming in towards that principal amount and you will be surprised how quickly you start seeing significant change.
The snowball effect
You have probably heard of the snowball effect somewhere along the line. It’s a simple concept, start by paying back your smallest loan and work towards your larger ones to build momentum and see tangible gains towards your goal. This can be effective, but I also think its important to look at which loans are causing the most interest growth. If you can consolidate and refinance, this won’t be an issue. Consider working on lowering your loan with the biggest interest payment first as an alternate to the snowball plan as the smallest loan and largest interest may not be one in the same.
Deferment and Forbearance
How many of you have had a friend tell you, “apply for deferment and pay it back later when you are making more money!” While that sounds great and simple, it’s not quite a great as it sounds. Deferment and forbearance are a way for you to put off repayment of your loans, true, but what they don’t tell you is during that time if you are not making interest payments, those loans will continue to grow, adding all those interest payments to your principal amount when your deferment period is up, leaving you with an even greater amount to pay back. Avoid this at all costs.
Half of the battle against student loans is simply understanding your enemy. Instead of the out of sight, out of mind philosophy, take an active role in tackling those student loans. Try to stay away from the stories online about how the 24 year old paid back all of their student loans in one year. Those are extremely rare situations and not typical of what a normal person can do. It can drag down your mindset and staying positive towards your progress can be a huge drive to accomplish this goal. Wondering how you are supposed to pay back your loans and take some of those life steps we talked about earlier? Check out some of Indy Wealth Solutions prior articles or contact us for a personal conversation.