Julie Huser, Research Analyst, Purdue University
With graduation just around the corner and student debt ever on the rise, here are a few tips to keep your head above water once you get thrown in the deep end. In the 2010-2011 academic year, Purdue West Lafayette undergraduate students who borrowed, graduated with an average of $27,286 ($314 monthly payment*).That is an average of $24,056 ($277 monthly payment*) for Indiana residents and $36,760 ($423 monthly payment*) for nonresidents. Consider these tips wherever you are in the borrowing cycle.
1. While you’re still in college, only borrow what you need. If you live like a king in college, borrowing the maximum amount of loans offered, you will pay for it dearly once you graduate. In order to avoid the sticker shock of your cumulative student loans, take the time to calculate your monthly payments each time you receive another aid disbursement. There is a simple calculator on the Federal Student Aid website. Live frugally while you are a student, get a part-time job and live like a king when you graduate—or live a little less frugally anyway.
2. Set up automatic account withdrawal for your loan payments. Some loan servicers will actually cut your interest rate by one or two percentage points after you sign up for an auto-withdrawal service and continue to make on-time payments for a specified amount of time. Just make sure to watch your account’s cash flow to cover your loan payments, avoid insufficient fund fees, late fees and a lowered credit score. A lot of times, you can specify a date that your payment is withdrawn. If you make the auto withdrawal date after pay-day, you can make sure that your student loans are your first priority.
3. Pay off your student loans first. Even if your other loans have higher interest rates or more fees, it is actually a better idea to pay off student loans first because it is often unforgivable, meaning that even if you do hit hard times and need to file for bankruptcy, you will still have to pay back the amount you borrowed. Defaulting on your student loans will wreak havoc on your credit score. Your wages can be garnished. Your tax refunds will be withheld. Even your social security income could be taken from you if you haven’t paid off your loans by the time you retire. That being said, these loans should be your top priority to repay.
4. Make at least one extra payment per year. Make more if you can. If you pay one extra payment per year directly toward the principal, you will cut the amount of interest paid and pay off your loans in less time, freeing up future income for other projects. Inquire if you can automatically set up extra payments just like your monthly payments.
5. Think about negotiating the monthly payment of your student loans into your first starting salary. If you don’t, you are allowing yourself to take an instant pay cut. If you have $345/month payment ($30,000 student loans at 6.8 percent), your salary will be instantly cut by $4,140! You will want to say something about this once salary negotiations are underway, not during your first interview.
*Payments are calculated on 6.8% interest over the standard repayment period of 10 years or 120 payments per the federal student loan calculator (http://www.direct.ed.gov/RepayCalc/dlentry1.html).