Tag Archives: interest

My Student Loan Journey Pt. 2: Climbing the Mountain of Debt

10 Feb

Casey Doten, Financial Aid Administrator – Purdue University

I knew going into college that I’d have to take out student loans to help finance my degree. While getting myself $48,600 into student loan debt was less than ideal for me, I was able to earn my degree. However thanks to the miracle of interest, my student loan debt had increased from the $48,600 that I had borrowed to $54,800 by the time that I began repayment.

The scary part? That $54,000 could have been even higher. Thankfully I had a couple of things going in my favor that helped to prevent that. A good portion of my federal loans are subsidized and did not accrue interest during school. I also had a loan which required me to make quarterly payments to help keep the interest from adding up (unfortunately these payments always hit me at the worst times in college). Had I not had either of those two factors, my loan debt would have been $59,900 when I finally started repayment.

So how have I gone about tackling this $54,800 debt? Being honest, it hasn’t been perfectly approached at all times but after a few initial mistakes I’ve come up with a plan and am paying it off as quickly as I can.

my student loan journey 2.jpgMaking mistakes early on

During my grace period of six months between graduation and my first payments becoming due, I had saved up a little money working two part-time jobs, but I never put anything toward my loans. As my grace period ended, I was able to get a full-time job along with working ten or so hours a week on the side.

So in November my repayment officially began. I had always heard people say “If you can afford to pay a little extra on your student loans, you should do it”. Getting rid of my student loans was a priority for me, so even though I wasn’t exactly swimming in money I paid extra on my loans. If my payment was $115 for a loan, I’d pay $150. The problem is that my approach of paying a little extra on every loan per month was one of the least efficient ways possible.

Pay more on loans with higher interest rates

What I should have been doing was approaching my repayment with a real plan rather than just tossing a few extra bucks at it.

I learned about the avalanche and snowball debt payment methods from some friends and after some research realized I could take my loans head-on with a plan. I started paying the minimum on every one of my loans except the one with the highest interest rate where I put all that extra money I had previously spread out between the other loans.

Using this avalanche method, I paid on the highest interest loan and then when that was finished up I took that money and started paying it to the next highest interest loan. This approach helps me pay the least amount of total interest possible.

Understand options & repayment plans

Despite the fact that I’ve been able to meet my monthly loan payments, I realized decided to enroll in an income based repayment plan. This brought my monthly payments on my federal loans down from over $300 to around $70 each month. Why did I choose an income based repayment plan when I wasn’t having troubles making my repayment? I found out that having a lower amount due each month could both help my repayment plan and allow me to be more flexible in my finances.

For my repayment, it allowed me to pay less on several of my loans and kept interest from my subsidized loans from accruing (the interest can be covered for up to three years). I took the $230 I wasn’t obligated to pay to all of my loans and rolled it into the extra I had already been putting toward my highest interest loan.

The other perk was that it gave me a lot more financial flexibility, so if unexpected events popped up I could just pay the minimum on my loans and use the money I would have paid to cover whatever emergency happened.

Luckily I never ended up needing this and I have been able to double down on my avalanche repayment and target my highest interest loan with the money I would have been paying otherwise been spreading out to my other loans.

Make payments right away… or make them automatic

Before I started making my loan payments, I felt like I was making just enough money to get by. I didn’t believe I could find $600 per month just for student loans, let alone money to pay ahead. The secret that I found was to make my student loan payments right away once I got paid. Rather than having to worry about what is left to make my loan payments, I prioritized them and made the extra payments part of my mandatory bill paying routine at the beginning of each month. I also found out that one of my private loans and my federal loans offered a small interest rate reduction for enrolling in automatic payments, which I promptly enrolled in to reduce the total interest I would pay over the loans’ lifetimes.

Roll over other debts

During my first year and a half of repayment, two things events had an effect on my debt: my college beater Jeep died on my commute to work forcing me to buy a different vehicle, and I got proposed to my then-girlfriend, now wife. This gave me another $450 per month in payments to make between the car and ring. This squeezed my personal budget to as thin as it could possibly get, but I still made sure to prioritize getting these payments in right away after getting paid. I realized I that I could make this new budget work, so after paying both off I took $350 of that and rolled it into my student loan payments helping me accelerate my impending pay-off even further.

Where I’m at Today

As of this moment, I still have $42,246.38 left to go. I’ve made great progress but I’m still paying over $200 every month on interest alone. It can be depressing to realize how much I’m losing every month to interest, but I know that my current life wouldn’t be possible without the degree I earned and the experiences I had. Rather than concentrating on how far I have to go, I prefer to reflect on how amazing it feels to know that I’ve paid my loans down more than $12,500 in student loan debt in 27 months in addition to over $9,000 between my car and wife’s engagement ring. The end might not be near but that doesn’t stop me from taking one step at a time toward being student debt free.

When Should I Start Paying Off Debt?

3 Dec

College is a time when students worry less about incurring debt and more about learning and enjoying new-found freedom. But as graduation nears, you’ll have to test the debts you’ve taken on during school.

Getting out from underneath debt

Graduate carrying heavy debt load

If you’re like most students, you’ll have thousands of dollars in student loan debt. You might also have some credit card debt or a car loan to pay off. Becoming debt-free is made even more challenging because you may not yet be settled in a permanent job or career. Just remember that countless other new graduates are in the same place. While many young adults go about debt payment in less-than-ideal ways, this is your opportunity to get out of debt, develop good financial habits and possibly even save money along the way.

Plan of Attack

Before you start repaying your debts, go over what types of debts you have and find out when payments will be due. If you have credit card debts, you probably already know that you have to start making payments immediately.

Student loan lenders understand that graduates often need time to find jobs and begin earning a steady income. Because of this, there’s almost always a grace period, a time of about six to nine months between your graduation date and the date your first payment is due. Even during the grace period, however, you may still be responsible for paying interest charges. Check the details of your loan to find out when you’ll be responsible for paying interest.

Once you understand the bills you face, you’ll be better prepared to create a plan of attack.  Decide how much money you can afford to put toward paying down your debts. You’ll need to cover at least the minimum payments each month on your debts. If you haven’t found a job yet, are using savings to pay down debts or are borrowing from your parents, it’s usually best to keep your focus on the minimum payment.

Paying Down Debt

Paying down debt

counting money

Reevaluate these payments after you begin earning an income. Once you have a job, make it a goal to start making significant progress on your debts rather than just paying the minimum amounts. It’s helpful to keep in mind that for each month you stay in debt, it actually costs you more money by accruing interest. So if you make larger payments each month, you’ll get out of debt faster and save more money in interest.

You’ll need to once again reevaluate your monthly payments after the grace period ends on your student loans. Having this additional financial responsibility will usurp some of your monthly funds, taking away from your ability to pay down your other debts like an auto loan and credit card debts.

Even so, if you still have credit card debt, this should be your top priority; credit cards usually come with inordinately high interest rates, so this type of debt will end up costing you a much higher percentage of your original loan. Until you have credit card debt under control, pay just the minimum on your student loans and divide any extra money toward reducing your credit card bill.

Again, reevaluate your monthly payments if there are any changes in your finances. You’ll have to adjust your budget, for example, if you finish paying off your credit card debt, earn a promotion or receive a raise.

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Katherine Pilnick writes and blogs about issues touching on personal financial well-being and issues that influence it for Debt.org, America’s Debt Help Organization.

5 Ways Credit Cards Manipulate You Into More Debt

26 Nov

Katherine Pilnick writes and blogs about issues touching on personal financial well-being and issues that influence it for Debt.org, America’s Debt Help Organization.

Of all the financial advice anyone with a credit card can give you, maybe the most likely thing you would hear again and again is, “Beware of the special offers.” People are inherently trusting and seeking acceptance. But that’s one of the things you need to be most cautious about when you are dealing with credit cards. They are like vultures. They prey on the behaviors and patterns of the weak, and how many of us won’t use something like credit when it is offered to us? Take this financial advice and be wary of these 5 ways in which credit cards manipulate you into greater chasms of debt:

credit cards

credit cards

1.) Introductory Interest Rates: Oftentimes providers will start their duplicity at the beginning of your relationship. By offering you “introductory 0% interest rates for six months,” you may think that you can just keep spending and those purchases won’t charge you any interest rates. That is true — for the period of six months. If you pay off your balance in full in 179 days or less, you have won. You are not charged any interest. If, however you don’t pay for your purchases by the time the introductory period is up, then in some cases you will pay for all the interest compounded since Day 1. It’s a tricky thing and something you should look over when they first mail you those really tiny print notices.

2.) Promotional Offer Rates: Another thing that credit cards may do that you have to watch out for is offering you promotional offer rates — say for all purchases made between Thanksgiving and New Year’s, you will pay very low interest rates. However if these balances are not settled in full, again, you could be on the hook for the amount due. Just because there was no interest over that time period, you need to be wise to the terms of the agreement or you could be on the hook for the thing.

mountain of debt

mountain credit card mountain

3.) Loyalty Programs: A third reason to reach out for deeper financial advice is when credit cards begin offering you loyalty programs. Because you are a “preferred customer,” they will entice you to want to spend more by dangling offers in your face that you just can’t say no to. Maybe they will offer you some “rewards bucks” or allow you “special offer days.” Whatever the offer is, these loyalty programs are just interested in getting you to spend more money than you want to.

4.) Shopping Days Bonuses: Another way that credit providers lull you into economic submission is through their special programs offering “shopping days bonuses!” If they want you to use their credit card, say, on Black Friday or the weekend after Thanksgiving, the credit providers can offer you special incentives to spend more over that time period and in return you will get some silly little trinket. Even when credit providers offer substantive rewards, it is usually only because their customers have spent sizable amounts of money.

5.) Extension of Credit: A final reason to cry for financial advice is when a credit provider offers you, as a regular, on-time paying credit card customer, more credit. Extending more credit, particularly to those waylaid by maxed out cards already, is dubious for sure. People who have reached their credit limit may feel as though they need to take a step back and settle their debts. But when a credit card says, “No, it’s OK. Here, take more!” they are deliberately making the easily victimized, victims themselves.

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