Student loan debt has become a major point of concern for recent college graduates and their parents. Getting a college education is more expensive than ever, but many students feel that the career benefits of having a degree outweigh the high price tag. As a result, more college students are entering the workforce with entry-level salaries, owing tens of thousands of dollars in student loans. Though this problem is serious, it is not insurmountable. With smart financial planning and a disciplined approach, you can pay off your student loans, leave debt behind, and begin building toward your future goals.
With the average cost of a four-year college exceeding $32,000 per year, students are faced with a dilemma: Take on student loans and graduate in debt, or forego a college degree. That’s why 69 percent of the class of 2018 took out student loans and graduated with an average of $29,800 in private and federal student loan debt. And 24 percent of their parents will be paying off an average of $35,600 in Parent PLUS loans.
After graduation, graduates will likely be earning entry-level salaries for several years. So how can recent college graduates pay their student loans and still afford housing, food, and the other expenses they need to get started? It all comes down to effective financial planning. With the right financial strategy, anyone can pay down their debt and still have enough room in the budget to enjoy life.
Manage Your Money
If you are going to graduate with student loan debt, the quickest path to debt-free living is to stay ahead of your loan payments in order to pay off your student loans faster. Here are a few strategies to help you generate more income and reduce your spending in order to pay off your debt more quickly.
The first step is to develop a personal budget. Determine what you take in each month and then compare your monthly expenses to your income to see how much you have left after paying for necessities. Any extra cash should be applied to paying off student loans.
If the amount of extra cash is small, which is common with an entry-level salary, then consider how you can save extra money and apply it to your student loans. By eating out less often, cooking dinner at home, and opting for free or inexpensive activities, you can save a little extra cash each month and increase the amount you’re putting toward loan payments.
On the flip side of saving is earning. Do you have a skill or hobby that could earn you some extra income? Side hustles such as photography, graphic design, tutoring, freelance writing, babysitting, teaching sports or fitness classes, teaching English as a second language, driving for Uber or Lyft, and selling products on Etsy or eBay are all great ways to add to your income and gain valuable experience in the process.
Attacking Your Student Loan Debt
In addition to generating more cash, you also can find smarter ways to approach student loan debt. Try some of these strategies to lower your debt faster.
First, plan to pay more than the minimum amount due each month. Much of your student loan payment goes to interest, so the more of the principal you can pay down, the lower the interest costs will be moving forward. Paying more than the scheduled monthly payment will save you a lot of money in the long run.
If you can, start repaying your student loans before you graduate. Technically, you don’t have to start paying back your student loans until six months after graduation, and loan interest doesn’t start accumulating until after you graduate. But why not eliminate as much of the interest expense as you can by starting to pay your higher-interest loans before you graduate?
Another strategy is to apply the snowball method to repay your loans. The snowball method involves targeting the smallest loan and creating a strategy to pay it off first, putting as much money toward it as you can while maintaining minimum payments on your other loans. Once that smaller loan is paid off, take the same amount you were paying and apply it to the next smallest loan, and so on. You can also apply the debt avalanche, where you focus on the loan with the highest interest rate first.
You also might consider consolidating your student loan debt in order to get a lower interest rate or a more feasible repayment schedule. First, determine what interest rates you are paying on private and federal student loans. Those rates are probably competitive, but you may be able to find a loan at lower interest that will save you money. Paying off student loan debt with another loan at lower interest or a loan with a different repayment structure could help you get out of debt sooner.
Once you graduate, know that with the right attitude, motivation, commitment, and financial planning, it is possible to not only pay off your loans, but do it quickly. Wondering which route makes the most sense for you? The financial advisors at First State Community Bank are here to help.