In 2012, 71 percent of students who graduated 4-year colleges took out student loans. Debt isn’t fun, but education is one of the better reasons to take on debt. While you may not enjoy paying back student loans there are some steps you can take to save yourself some money and make your payments hurt a little bit less.
- Prioritize high-interest debt: While Federal Direct student loans are capped at 6.8%, private loans are not. Even worse interest rates? Credit cards. If you have credit card debt, prioritize paying it off before your student loans. 6.8% interest is no fun, but credit card interest rates 20% and higher can be crippling.
- Income based repayment: If you qualify for an income-based repayment (IBR) plan, do yourself a favor and apply for one. Generally if your debt is higher than your income you will probably qualify. Even if you are able to make your payments without much issue, an IBR can still save you money. How you may ask? If you keep paying the same amount you did before, you can target your payments toward either your highest interest or smallest loans depending on which repayment style fits you. Not to mention, if you are one of the approximately 50% of people who work in public service, you can qualify for loan forgiveness after 10 years.
Pick your payoff: There are two main methods for paying off debt when you have multiple balances to pay. The snowball and the avalanche method.
The snowball method entails taking the extra money you have and paying off your smallest debts first while paying the minimum on the rest. Then once that is taken care of, you roll that payment into the next smallest and knock off your obligations one-by-one. This is best for those who like the reward of seeing their different loans disappear the quickest and can help you stay on track easier.
The avalanche method is similar to the snowball where you make minimum payments on all loans but one. The difference is that you target the highest interest rates first. While you may not experience the visual rewards of seeing the small debts disappear quicker, you will save the most amount of money in the long run this way.
One way to not repay is by spreading out the extra you pay to all debts and pay a little bit additional on everything each month. This provides neither of the advantages that the avalanche and snowball method have while still costing you the same amount. You get less savings than the avalanche, and less of the reward that the snowball offers.
Raysha Duncan, Purdue University Student and Peer Counselor
Last year the 8th most common New Year’s resolution in America was to get out of debt. However, if you were to poll Purdue’s student population on how realistic getting out of debt was for current students, the student’s response would be laughable. Every year students rack up more and more debt in student loans to pay for their college education. It’s impossible to expect any student to pay off all of their debt by working part-time jobs and studying for class all night long. Perhaps a more reasonable New Year’s financial resolution for college students would be to start setting money aside every once in a while.
Climbing Out of Debt
This sounds like a pretty hefty task when it’s not explained. If students stop depending on their credit cards so much and only borrow what they need in student loans, they could save themselves a little pain in the long run by minimizing their debt today. Cutting back on expenses doesn’t have to be painful, especially once you’ve had time to adjust. For instance, I love drinking coffee and I really love the delicious coffees sold in coffee shops, but I know it’s expensive, upwards of $5 per coffee. So, recently I started opting for buying my favorite brand of coffee and brewing it at home. A bag of my favorite brand costs around $10 a month. If I only have one cup of coffee every day for a month, I’ve already saved myself $140 for that month. Now, I do crack and have to buy a delicious coffee once in a while, but for the most part, I’ve become satisfied with a good cup of joe at home.
If instead of buying a coffee every day, I put $5 in my savings account instead, I would be able to save $1825 in one year. Even if I bought myself a coffee just once a week to have a little treat, I could still save $1565. That sounds easy enough right? Just by cutting out one seemingly small, but regular expense in my life, I could save a lot in one year. Here’s the catch, in order to save the money, I actually have to put it into my savings account or somewhere else where I won’t touch it, which I haven’t been doing; but, I think I’ve found my New Year’s resolution.
New Year’s resolutions are meant to help better lives and reach goals. They’re not meant to be impossible to reach. Taking baby steps towards become more financially stable in college could definitely help everyone in their future. It’s harder to make drastic cuts in finances when they are already so small, but by cutting corners in expensive and bad habits, we could all definitely save a lot.