Student Loan Blues

Student Loan Blues 😢

Hello Rookies!

Many rookies new into their budding careers are fresh out of school and well into debt.  The prospect of finally utilizing years of investment and time into an education is exciting and wondrous.  That is, until your loan office mails you your first loan repayment notice. 

Have no fear rookies, managing your student loans are easier than the media portrays.  There are two main types of student loans:

Private Commercial Loans

These loans are provided by private banks.  They usually carry similar interest rates to those offered by non-subsidized loans offered by the government or have variable interest rates.  Unfortunately,  these loans are not as flexible as government based loans and will not be the focus of our discussion today. 

Government Based Loans

A majority of student loan debtors fall into the government loan category.  Loans that were offered via FAFSA and other government student loan programs.  The key to managing these loans is understanding the types of options and flexible repayment options available.  


 Your possible loan situation scenario:

 I have no problem affording my current monthly student loan repayment bill
Great!  You are financial secure and comfortable enough to cover the bill each month.  You have a few comfortable options here.
 
1 - Continue to pay the current amount you owe in full. 

Advantages
  • less interest paid over the life of the loan
  • pay off the loan in full on scheduled time
Disadvantages 
  •  that cash be utilized elsewhere (savings, special purchases, other high rate debt payments) 
If you choose to continue to pay the loan amount in full each month something you MUST do immediately is place your account on auto-pay.  Many loan companies offer you a discounted interest rate on your loan just for subscribing to auto-pay.  It is free and takes the chore off your shoulders of having to worry about paying on time each month.  There is almost no reason not to subscribe to auto pay if you can and are going to pay for the total amount owed each month as it saves you money and missed loan payments that result in penalties and increased interest accumulation.

The main disadvantage of continuing to pay the amount in full as originally billed is that you may not have any money left over for your savings, 401k contributions, or even a vacation you were hoping to take each year.  There are ways to lower your monthly bill owed that will be discussed below.


2 - Continue to pay the current amount until reaching a certain point then attempting to reduce your monthly bill (example original loan amount $50,000.00, pay it off monthly until it shrinks to $20,000.00 then attempt to reduce the monthly bill)

 Advantages
  •  You have paid off a large amount of the principle  resulting in reduced overall interest costs over the life of the loan 
  • Once you get the monthly bill reduced you now have extra funds to put towards savings, mortgage, vacations ect.
Disadvantages 
  • Paying less each month results in the loan taking longer to pay off resulting in more interest accumulation over the last half of the loan (however the interest is against an overall smaller principle amount)

Initially paying off a large portion of your debt can significantly result in less interest paid over the life of the loan.  This however can be at the sacrifice of having no savings, 401k, money for a home or vacations.  Taking the approach to initially pay off a large amount and slow down later allows you to later accumulate savings and not come out of a 5-30 year loan having nothing to show for it in your bank.

3 - Attempt to reduce your monthly bill just to free up some cash

 Advantages
  • Reducing your monthly bill from the get go allows you to have more funds available for a home, for retirement savings, and general spending
  • You may not feel as stressed financial on your quality of life
Disadvantages
  •  Obviously when you reduce your monthly payment you also extend how long it takes it pay off the loan resulting in more interest paid over time
 You may pay off you loan quickly by paying the original amount owed each month however you may also find yourself in 10 years with zero in your savings account and a decade worth of budgeting just to pay off that loan.  It is a good idea to always have at least 3-6 month worth of bills in a saving fund just for emergency purposes (job loss, unexpected bills).


4 - Pay Continue to pay the current amount due each month and then some extra each month.

 Advantages
  • Pay off you loan much quicker
  • Pay less in interest over the life of the loan (save money)
Disadvantages
  •  Extra cash can go to savings, retirement accounts, fun times

 This route is great to effectively just get rid of a loan.  Instead of paying $500.00 a month owed you pay an additional $200.00 to total $700.00 a month.  This reduces interest paid on the loan over all and helps you get out of debt quicker.  However, what are you giving up to rush out of debt?  A savings account, a new car, a vacation?  If you like this route but also like the idea of saving some money aside consider option 2 above.


5 - ( see extended interval repayment plans below )
I DO have a problem affording my current student loan repayment bill
Have no fear.  There are options available to relieve some of the stress of paying for that bill each month.

1 - Income based repayment plans
Advantages 
  • Allow you to pay a monthly bill which typically does not exceed 15% of your take home pay 
Disadvantages
  •  Not everyone is eligible
  • Interest still accumulates over time
Not everyone is eligible for this program but income based repayment is a great option for lower income earners.  The exact cutoff for eligibility depends on your situation (weather married or single) and take home pay.  The monthly loan repayment amount due typically does not exceed 15% of your take home pay allowing you to afford that monthly bill.  Signing up usually requires a few weeks and proof of income usually with tax filings.

2 - Extended interval repayment plans
 Advantages
  •  Spreads a 10 year loan into a 25-30 year loan making payments lower each month
  • Easy to sign up for  
  • Less stress on your credit
Disadvantages
  • Possibly more interest paid over the life of the loan
 What extended interval repayment plans do is give you the option of changing the standard 10 year repayment to a 15-30 year repayment depending on what is available through your loan processor.  It is very easy to do with just a few clicks.  Most accounts with over $30,000.00 owed are eligible for longer payment plans extending up to 25-30 years.  This can reduce the amount you owe instantly and you can still stay in auto pay to reduce your interest rate.  As a bonus if you apply for a mortgage the banker will see that you have 25 years to pay off your student loans rather than 10 years (lower monthly payment) allowing you to afford that housing loan easier.  The downside to this option is interest will always be there and will accumulate over the longer period of time resulting in the loan costing more.

Even if you can afford your loan it may still be a good idea to extend the interval for 25-30 years.  Extending as mentioned takes less strain off your credit report (it will show that you owe less each month).  Although you have lowered your monthly amount due you can still make higher payments (if you want) and can pay the lower payment when you find yourself in need of more money.  Overall extending the interval can have advantages for both those with and without trouble affording their original monthly loan repayment bill.

3 - Deferment 
Advantages 
  • When your really in need of cash (or have none) you can owe nothing on your loans
Disadvantages
  • Interest still accumulates
  • May require proof of hardship
Deferment refers to postponing loan repayments until a later time.  This should be used as an emergency option only.  If you find you are not able to pay you student loans with any of the methods above this may be your last option.  Deferment allows you to make zero payments for months at a time usually due to job loss or trouble finding a job.  The conditions may also extend to financial hardship such as starting your own business or emergency expenses.  Some processors allow you to defer with a just a few click on their website but others may require proof of financial hardship and a phone call.   Keep in mind everyday that you do not pay (or defer) payment you are gaining interest on your loans (and possible penalties and fees if applicable).


Tips for Everyone to Take Advantage of

  • Due to compounded daily interest on many loans - making weekly payments instead of once monthly payments can help reduce the amount of interest you pay over the life of the loan (paying $300.00 over 4 payments may serve you better than paying a one time $300.00 a month payment).  This practice tends to allow a larger percentage of your payment to be applied to principle rather than interest.

  • Always use the auto pay feature when able it will reduce your interest rate and total cost over the life of the loan

  • Interest paid on student loans is TAX DEDUCTIBLE (may lower the amount of money you owe on your income taxes) the savings are dependent on your current income.  Check latest tax deduction eligibility criteria at IRS.GOV to see if you are eligible for this tax write off. 




Have any of your own ideas/tips? Share them in the comments section!

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