A long-term client recently informed me that his daughter “Paula” (name changed) graduated from the University of San Diego last year with a bachelor’s degree in political science. While she was able to obtain a job quickly at a company (she interned there for two semesters during her senior year), Paula is now faced with the daunting prospect of having to pay more than $45,000 in student loans.
Unfortunately, Paula is not alone in being saddled with college debt. According to a February 2019 Fortune magazine article, 45 million U.S. borrowers owe more than $1.5 trillion in student loan debt. Yikes! To put this $1.5 trillion figure in perspective, student loans are the second highest consumer debt category, second only behind mortgage debt . . . “Imagine That™!”
Debt Burden for the Class of 2018
The Institute for College Access and Success issues a detailed annual report concerning student loan debt. Data for the class of 2018 is here. Relevant highlights of the report for the class of 2018 are:
- Borrowers owed $29,200 on average
- Nearly two-thirds of college seniors, or about 65% who graduated from public and private nonprofit colleges in 2018, carried college debt into their post-graduate world
- Connecticut held the dubious honor of the highest debt load – $38,669, while Utah had the lowest burden – $19,728
- California is considered a “low-debt” state because its students graduate with $22,585 in debt. Presumably, the low-cost in-state tuition for many California colleges and universities reduced the average amount of debt a student leaves school with
- If there is any good news, debt levels “only” increased 2% from 2017
Typical interest rates for educational loans run from 4.5% to 7%, with a term of about 10 years. If you have the average debt of $29,200, you will be required to fork over $324 each month and can expect to pay $9,702 in interest, assuming a 6% interest rate (data taken from Bankrate.com loan calculator).
I doubt that anyone is surprised by the high cost of formal education . . . we’ve been hearing about soaring college costs for some time. The increase in costs, though, is sobering and begs the question of whether the current model still makes sense. No wonder so many young adults today graduate with both a degree AND a heavy debt burden. It’s a far cry from when I attended school (and it wasn’t all that long ago!)
These figures are averages and costs will vary of course, but they paint an unsettling picture. While a college education is still a worthwhile long-term investment, $45,000 in debt for Paula or anyone else just beginning their career is a substantial burden for someone who is 22 or 23 years old. It makes it harder to buy a car, a home, getting married and especially – starting a family.
All is not lost! We’ll explore several strategies which can help eradicate student loan debt, or any debt burden for that matter. Before we get started, let me make clear that there is no magic formula. Student loan debt is simply debt. It accrues interest and lenders expect to be repaid. But if you set a goal, map out a plan, and stick to the blueprint, you’ll be surprised at how much ground you can cover.
Here are eight strategies which can quickly eliminate your student loan debt:
1. Apply for Student Loan Forgiveness – the Public Service Loan Forgiveness Program forgives federal student loans for borrowers who work for certain public service employers, such as the government or a non-profit organization. You need to work at least 30 hours per week for at least 10 years at a public service employer and must make a monthly payment under a repayment plan for the full 10 years. According to the Government Accountability Office, the U.S. Department of Education rejected 99% of applicants who applied for relief between May 2018 and May 2019 While this is a possible option, let’s explore more promising strategies.
2. The Auto-Payment Option – the “set it and forget it” method. Does your loan servicer offer auto-payment? Most do. You may even save 0.25% on your interest rate, and auto-payment is an extremely convenient way of paying back debt. Besides, you won’t have to worry about missing a payment, incurring a late fee and will never experience a “ding” on your credit report (at least as it relates to a student loan). This helps boost your FICO score – the all-important measurement of credit worthiness for when you are ready to buy that car, home, etc.
3. Make More Than the Minimum Payment – paying more than the monthly minimum greatly reduces the length of the loan repayment. For example, let’s assume you start with $29,200 in student loan debt and a 10-year loan at 6% interest. (The national average amount of debt.) By adding an extra $100 to your monthly payment, you’ll pay the debt off nearly three years early! As well, you’ll save more than $3,000 in interest payments (data taken from Bankrate.com loan calculator).
The only caveat with this technique is to confirm the extra payments are properly applied to principal. This step is important, especially as it relates to the method you use to pay down your debt – which is discussed in options 4 through 6 below.
4. Pay Off the Smallest Loan First – the “snowball” method is what radio host and author Dave Ramsey recommends to his listening audience and readers to become debt free. Make the minimum payments on all but the smallest loan; for the smallest loan, apply all your disposable income. The smallest loan may not have the highest interest rate, but you may feel a sense of accomplishment from “checking off the box,” or “wiping out” one loan. You gain motivation and momentum when you pay off a loan and you might as well start with the smallest loan to get the “snowball rolling.” Plus, by knocking out one loan, you improve your credit score and lower your debt-to-income ratio.
5. Pay Off Higher-Rate Loans First – the “avalanche” method is an alternative to the “snowball” method listed above. Private student loans are typically paid first in the “avalanche” method because they often have higher interest rates and less flexible repayment terms in comparison to federal student loans.
If you have more than one loan, make the minimum payment on lower-rate loans and apply that extra money to your highest rate loan first. There’s no reason to pay more in interest than is necessary.
6. Rollover the Payment – if you choose option 4 or 5 above, once you have eliminated the first loan, take what you were normally paying each month on the first loan and send it to the loan with the next lowest balance or next highest interest rate. Make sense? It’s called “gaining momentum.” Once you eliminate the second loan, you have additional cash to plow back into the third loan, etc., etc.
Keep the ball rolling until you’ve eliminated all your student debt. But don’t stop there. When your student loans are paid off, you may want to tackle credit card debt next or save for a vehicle, down payment on a home, or other large-ticket item. Establishing behavioral patterns of dedication and consistency while you are still young will pay dividends throughout your life.
7. Can you Refinance to Lower Rates? A lower interest rate may translate into fewer payments and can be beneficial if your salary is low when you first begin your career. Another perk is that it is penalty-free – there are no fees or costs incurred in refinancing the loan to a lower interest rate. Additional benefits of refinancing may include:
- Paying off the loan sooner
- Paying less in interest over the life of the refinanced loan. Due to the recent cut in interest rates by the Federal Reserve Bank, interest rates are now as low as 2.06%
- Releasing a co-signer, such as a parent, from liability for failure to repay the loan
Just be careful about extending the length of the loan. Lower payments may appear attractive, but the goal is to eliminate your student loan debt as soon as you can. If you are refinancing a federal student loan, make sure you are comfortable with the new monthly payments. Be aware, you will lose out on some of the advantages of a federal loan, such as income-based repayment, deferment or forbearance.
8. Extended Payment Plans – such plans reduce your monthly payment and may be income-based. They can be a helpful option if your financial situation will result in defaulting on your student loan, which could “ding” your credit report and result in your wages being garnished.
Frequently, there are two extended payment plan options to choose from: fixed or graduated. The fixed option sets a consistent monthly amount for the entire repayment period. The graduated option begins at a low payment but usually increases the monthly payment every two years. The benefit of either option should be that repayment under the extended plan is more manageable than the current loan terms are.
They may sound tempting but be forewarned: it will take longer to pay off your student debt and you’ll pay more in interest. Your goal is to put your college debt in the rearview mirror as soon as comfortably possible.
Conclusion: Use These 8 Strategies to Quickly Wipe Out Your Student Loan Debt
Be strategic about choosing how to pay off your student loans. Use our techniques as a guide. As always, we’re here to answer any questions you may have.
Have you ever heard the adage, “How do you eat an elephant? One bite at a time.” What this means is that anything which looks overwhelming or insurmountable at first glance can be gradually accomplished by taking on a piece at a time. After a while, the continuous effort will reap its rewards. Similarly, if you establish a repayment plan to tackle your student loans and follow it as best you can, you will continue to take “bites” out of your student loans until one day they are completely gone and the weight of what felt like an elephant will be off your back for good . . . “Imagine That™!”
Written by R. J. Kelly, January – 2020
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