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How to Make Your Student Loans Worth the Investment
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Do you have student loan debt? If you do, you are far from alone. About 69% of all graduates have student loans, with an average debt of $28,200. With that being roughly equal to a year’s wages at an entry level job, it can put a severe bite on your wallet. But, by making good choices, you can make school a positive investment instead of a financial drain.
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The Burden of Student Debt
While a degree is more necessary than ever to compete in the workplace, it can take some time for many graduates to find their footing. In a recent survey, only one graduate out of five said that he or she felt capable of affording food, rent, transportation, cellphones and the student loan repayment. And, it can take some time to rise to a pay rate that makes all of those items feel affordable; 65 percent of graduates earn less than $45,000 with their first job.
Student loan debt is unique in that it cannot be discharged in bankruptcy. If a loan is forgiven because of disability or because the time runs out on an extended payment plan, the forgiven amount is counted as income. So, most of us have little choice but to make the payments and eventually get rid of the debt.
Making School Pay
First, take the long view when thinking about student debt. A person who is a college graduate will earn, on average, $800,000 more than someone who does not have a college degree. By focusing on degrees in high-demand STEM fields, you can be even more sure of making back what you spend earning that degree.
Next, make sure you understand your loan terms and the impact of any choices you make. A loan that you allow to go into default can wind up costing you 25% of your debt in additional fees. If you owe $30,000, that means you will pay an additional $7,500 over what you would have originally had to pay in principal and interest. Next, be sure that you understand the terms of your loans. According to Forbes, while four out of five graduates know the payment dates of their loans and three quarters know how much they owe, many are otherwise uneducated about their loans. More than half are unaware of the consequences of defaults on loans, and 60 percent did not know how many payments they had to make to pay off their loans completely. Many others are unaware that they can negotiate lower payments if they feel unable to pay their loans, or they do not know about hardship deferments and other accommodations that are available to them.
If you don’t have credit card debt, consider attacking loans using Dave Ramsey’s famous “snowball” technique. By applying larger payments to each of the loans one at a time, you can pay them off more quickly and save on interest.
If you owe on several loans, find out whether it would be beneficial for you to consolidate them. Consolidating loans can sometimes lead to either lower payments or lower interest rates, depending on the terms offered under a new loan. And having fewer installment loans can raise your credit score by a few points. This can be particularly beneficial if you are just a few points shy of the number you need to be approved for a home loan. However, there can be drawbacks, particularly with private consolidation. You may no longer be eligible for deferments and other advantages that you would have on federal loans.
If you are not in a position to reduce your student loan payments, look for other areas of your life where you can do some belt tightening. Choosing used cars over new ones can make enough of a difference to pay an entire student loan payment. The average cost of a new car is roughly that of the average student loan debt. And, with an average payment that is just over the monthly cost of a student loan ($471 for a new car, according to figures from Experian), skipping a monthly car note can free up money spent on your loans.
Student loans can make new graduates feel trapped. They don’t go away with bankruptcy. And failing to pay them as scheduled can cost hundreds of points on your credit score and thousands of dollars in penalties. By moving forward and getting the loans behind you, you can benefit from the increase in credit rating you get from faithfully paying an installment loan and eventually be free of the debt and ready to make new investments in your and your family’s future.