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Seven strategies for paying off student loans
Graduation is a time of celebration. You’ve finished four—ok, maybe five years of school, and you’re ready to conquer the world. Do you know what else you should be ready to conquer? Your student loan debt.
In 2018, the total amount of student loan debt in the U.S. was at an all-time high at nearly $1.5 trillion. Spread over 44 million borrowers, you can take comfort in the fact that you’re not alone. While the idea of repaying your debt may be overwhelming and a seemingly impossible feat, take heed. We’ve got a few words of wisdom that can help you get started. With some self-discipline and a little sacrifice, you’ll be able to wipe out that I.O.U. sooner than you think.
Here are some practical strategies you can use to get your finances in order, knock down that debt, and be well on your way to financial freedom:
1. Live like a college student
You’re eager to venture out into the real world and live on your own. You want to rent a cool apartment that doesn’t include a hand-me-down couch and four other roommates. We get it. But if you can stand it, try not to inflate your current lifestyle too quickly. By keeping the same penny-pinching habits you used in college, you’ll be able to send a bigger chunk of your paycheck to your lender. The quicker you pay it down, the faster you’ll graduate to a more comfortable lifestyle that doesn’t include a repayment plan.
2. Send more than the minimum payment
If you continue to send the required minimum loan repayment each month, it’ll take the full term of your loan to pay it off. You’ll also wind up paying the maximum amount of interest. Consistently sending more than your $50 minimum payment, for example, will not only help you pay the balance down more quickly, it will significantly reduce the total amount of interest you pay over the term of the loan. Increasing your payment by any amount will save you both time and money, and who wouldn’t want that?
3. Pick up a side hustle
If you need more money, find a way to bring in additional income. Maybe you DJ on the weekends, wait tables at night, or work as a freelance photographer. Whatever your talent, parlay it into a side hustle. The key here is to have enough discipline to take the extra income and pay down your student loans. It’s not a way to save for a vacation, to buy a new car, or a Louis Vuitton bag—right now, anyway. If your objective is to tackle your student loans, keep your eye on the prize!
4. Send extra payments
Did you get a tax refund, a bonus at work, a little extra cash in your birthday card? It might not be the most exciting thing to do, but paying down your loan with a windfall, no matter how big or small, is the financially smart thing to do. Making extra payments, whether it’s each month, every quarter, or whenever you happen upon some extra cash, will speed up your loan repayment and reduce your total interest expense. The faster you pay it down, the more money you save, and the quicker you get out from underneath that student loan debt.
5. Add loan repayments to your gift wish list
C’mon, how many Starbuck’s gift cards do you really need? When friends and family ask you for birthday or holiday gift suggestions, you might tactfully ask them for a cash gift to pay down your student loan balance. Check out sites like LoanGifting or Generosity, now a part of GoFundMe, to make it official. Services like these are exclusively dedicated to helping reduce student loan debt by accepting and processing loan repayment donations. Set up a profile, connect it to your loan account information, and gift-givers can help you on your road to financial freedom.
Be sure to read the fine print, though. Setting up an account is free, but there are some fees deducted from each financial gift.
6. Refinance your student loans
Consolidating and refinancing your student loans at a lower rate can help you reduce the amount of interest you’ll pay. It may also allow for a shorter repayment term and a quicker route to becoming debt free. With one loan, one monthly payment, and a more competitive interest rate, it’s worth a look. There’s no harm in evaluating your options, especially when there may be an opportunity to save some cash and reduce your debt more quickly.
7. Look for employers who can help
Student loan repayment assistance is an employee benefit that’s growing in popularity. In fact, according to Forbes, it was the hottest employee benefit of 2018. Check out their list of ten companies that are already on board.
There are other similar programs, too. Government employees may be eligible for the federal government’s Student Loan Repayment Program. Nurses and teachers may be eligible for the Nursing Education Loan Repayment Program and Teach for America, and public sector employees may be able to receive assistance through the Public Service Loan Forgiveness Program.
Weighted down with student loan debt isn’t the ideal way you’d like to begin this next chapter of your life, but it’s a reality for most college students. You can make the minimum payments, repay your loans as scheduled, and live happily in the process. But, if you’re anxious to finish those monthly payments and begin investing in your future, use these strategies and get started sooner than later.
What you need to know before lending (or borrowing) money from family
In the midst of a financial crunch, most people consider borrowing money from a family member to be a better option than a bank or credit union, a good friend, their 401(k) plan, or even a low- or no-interest credit card. While most people look to their family as the non-judgmental, do-anything-to-help, ideal solution to their financial dilemmas, there are pros and cons to entering into this arrangement for both the lender and the borrower.
It seems like a simple transaction
From the borrower’s perspective, the application process is simple—just ask. Other than explaining why it’s needed, there are typically no other requirements to meet, not even a credit check. Even better, family members are often generous enough to loan money for free. Most don’t charge any interest, or if they do, it’s much lower than the best rate a bank or credit union could offer.
Family members are often eager to help, but if they’re lending money, they should understand their motivation behind their offer and the risks they assume in doing so.
The details define the loan
When a family member loans money to another family member, details need to be documented, and specific expectations must be set. Conversations around money are tough and sometimes extremely awkward. Think of this as the price you pay for borrowing money from a relative.
Discussions should address the reason for the loan and whether or not the lender is expecting to be repaid. A repayment schedule should be agreed upon, including dates, amounts, and method of repayment, and steps that will be taken if the borrower defaults on the loan.
The borrower should be able to provide the plan for repaying the loan and address the possibility of missed payments. Discussions should also define any rights that are granted to the lender until the loan is repaid in full, like approving large purchases or vacation plans, reviewing a monthly budget, or monitoring bank accounts.
The more detail discussed before the loan is issued, the better chance of preserving the family relationship. Many family loans are successful, but, in order to avoid tensions, communication must be continuous, clear, and in writing. While some family members might consider this too formal, it’s for the protection of both parties.
Lenders need to protect themselves
Any time you lend money, there’s a risk that the borrower will not be able to repay the loan. While you may have every confidence that the borrower will be true to their word, lenders should consider collateral to secure the loan. In the case of default, the sale of any named asset could help recover the outstanding balance.
Speak with your attorney to discuss any additional risks that you should address in order to protect yourself. You can also ask your attorney to draft the written agreement that includes the agreed upon details of the loan and its repayment.
Tax implications to consider
In addition to ironing out the details of the loan, there are serious tax issues to consider. The transfer of large amounts of money can alert the IRS. Even without any wrongdoing, it could trigger an audit into your finances.
There are also rules that address the minimum interest rates that can be charged on personal loans and a potential gift tax that can be assessed in some cases. There may be other tax implications that you hadn’t yet considered, so be sure to talk with your tax advisor before you set an interest rate, sign any documents, or transfer any funds.
How to Actually Keep Your New Year’s Debt Resolution
Paying off debt in the new year is a common resolution. But resolving to do something and actually doing it are two different things.
Taking a smart approach to building good habits, however, can help you master your debt in the coming year.
Jon Bailey, professor emeritus in the psychology department at Florida State University, suggests applying some principles of behavioral psychology to help you create sustainable habits.
“Our general approach is really from the angle of self-management,” Bailey says. “You have to know yourself and your environment so you can put some things in place … (to) make the behavior, in this case paying off debt, more likely to occur.”
With this in mind, here are tactics to help you follow through on your debt resolution:
Know what you owe
Create an inventory of your debts, including their totals and interest rates. Add them up to see exactly how much you have to pay down.
Defining your goal can help you focus your payoff journey and see what being debt-free would look like, says Weslia Echols, an accredited financial counselor in Michigan. “Seeing that picture clearly and knowing the value of not having that debt can motivate you to stay the course.”
Break it down into smaller tasks
Focus on the day-to-day steps needed to achieve your goal.
Figure out how much you can put toward your debt each month.
Choose how you’ll approach paying off debt. Consider using the debt snowball method, in which you pay off smaller debts first to secure early victories that will keep you motivated.
Trim expenses to find more money for debt paydown.
When making budget cuts, Bailey sees moderation as key to success. “If you go out to eat four nights a week, see what you’d save by only going out three nights a week. The extreme — cutting out going out entirely — isn’t going to last.”
Keep yourself accountable
Track your progress and create a backstop to help you stay focused, such as updating a friend about your progress each month. Think about using an app to help you cement your new habits.
Consider imposing a penalty if you don’t stay on track. For example, make a deal with your accountability partner that if you skip a payment, you’ll have to clean their apartment.
Build in rewards as you make progress. Each $100 you pay off, for example, give yourself some small treat to celebrate. This can keep you encouraged and on track toward paying off your debt in the new year.
Ways to use debt consolidation to reduce your debt
If you added up all your debt, how high is that number? And do you think it’s more or less than say, your best friend’s? Or maybe your boss’s? According to the 2016 American Household Credit Card Debt Study, the average household has racked up a whopping $135,924 in debt. Yeah, a big chunk of that is your outstanding mortgage, but it also includes an average credit card debt of $16,425. Did you know that the interest alone on a revolving credit balance of that caliber could cost you almost $1,300 per year– how crazy is that?
The cost of debt
We all know that debt doesn’t only come in the form of credit cards. It includes student loans, mortgages, car payments, medical payments, personal loans, and any other type of money borrowing or payment plan arrangements. All debt, however, is not created equal. While subsidized student loans might be 6.8%, unsubsidized loans could be as low as 3.76%. Compare that to credit card debt at 15% – 18% or more. An auto loan might be 5%, and a mortgage could cost around 4%.
If there is a type of “good” debt, it would be low interest and definitely used to finance something that will provide value in the future, e.g., your education or a home. “Bad” debt, on the other hand, is high interest, used to purchase an item that has no long-term value or is beyond your income level, e.g., revolving credit card debt, ridiculously expensive designer clothes or a car with a monthly payment that eats up the majority of your paycheck.
What is debt consolidation?
Debt management is a serious issue and a growing concern for many Americans. We all want to honor our financial commitments, but how can we handle outstanding debt and manage it more responsibly? Debt consolidation is the act of combining multiple outstanding debt contracts. It allows you to repay multiple creditors at one time and to consolidate multiple monthly payments into one new monthly payment paid to one new loan issuer. Ideally, it should reduce your interest burden and the overall long-term cost of your debt.
Ways to consolidate your debt
If managing your outstanding debt has become too much of a challenge, as it has for many people, there are several solutions that may help you consolidate your payments, save some interest, and salvage your credit at the same time.
Debt consolidation can be a bit risky from both sides of the coin, however. Borrowing funds to satisfy your current creditors addresses one issue, but how easy is it to fall back into your old habits? It’s a serious matter for both you and any financial institution to consider. You may be confident that you’re on the path to debt-free living, but your potential loan issuer may or may not be willing to take on that risk. It’s a common reason for any potential solution to be declined, so be prepared. There are both pros and cons to each approach, so it’s critical to understand what’s at risk when it comes to choosing an option.
1. A zero interest credit card
Credit cards and revolving debt and can be double trouble if you’re trying to consolidate debt, but if you can find one with zero-percent interest, you may be able to take advantage of that introductory rate for six months to a year. Zero-rate cards target high credit score consumers, so they’re a little harder to come by. If you qualify, be sure to check the fine print for transfer fees, penalties for late payments and any other hidden charges. Consider transferring only the amount you can pay off before the rate expiration because when it does, it will likely jump to a much higher rate. If you transfer more than you can pay off, be diligent about searching for another card to transfer the balance before the rate expires. Remember, too, that opening too many new credit card accounts within a given period of time may negatively impact your credit score.
2. A home equity loan or line of credit
Do you own a home? One of the most popular ways to consolidate debt is through a home equity loan or line of credit. By borrowing against your home, you’re able to withdraw cash that can be used to pay bills that are incurring higher interest charges. You may also get a tax break, too. Be careful, though. Default on the loan and you could lose your house. And be sure to talk with your tax advisor before pulling the trigger. Equity loan interest tax deductions could be limited in some instances.
3. A debt consolidation loan
Using a debt consolidation loan to pay off your debt increases your bill paying efficiency, saves your hard-earned money from excessive interest charges, and simplifies your overall life all in one fell swoop. With 15 different creditors, each with a different interest rate and payments due on different dates, who can keep track? With a debt consolidation loan, simply pay them all off and repay one new loan. It’s one single payment on one day of the month. Easy? Yes. Does it always add up to savings? No. Make sure you do the math. You also don’t have anything to secure the loan, like a house, so it’s likely that the lender might bump up the rate just a bit, understandably so. Be sure to do your homework and shop around.
4. A loan from a friend or family member
One final way to consolidate your debt is to borrow the funds from friends or family and design a repayment plan that agreeable to both of you. There are many variables involved in this type of arrangement, including being comfortable enough in your relationship to be able to ask for and repay a significant amount of money. You must also be willing to share the full details of your current financial standing, your plan for budgeting future spending and expenses and how you envision a structured repayment plan will work. Although borrowing money from family and friends may be easier and often less expensive from that of a bank or other financial institution, it also comes with significant risks. Money often changes relationships, especially when one party feels that the other oversteps their bounds or doesn’t honor the agreement. Choose wisely and weigh all of your options. Otherwise, strained relationships may lead to very awkward holiday conversation.
The main objective of debt consolidation is to get to a point where you’re comfortable with a monthly payment that effectively reduces your debt in a reasonable amount of time. Yes, debt consolidation can help you pay off debt faster and help you avoid credit damage, but it also requires discipline and sacrifice. If you’re ready to address your concerns with debt management, talk with your financial professional to design a plan and implement a solution that works for you and your wallet.
6 reasons why you should avoid Payday Lending
Short on cash this week? A payday loan might seem to be the perfect short-term solution. After all, it takes only minutes to apply for a small loan, the approval turnaround is quick, and the money can be deposited into your checking account within 24 hours. Ideally, you’ll pay it off with your next paycheck and get back on track.
It sounds like a great plan, but in reality, payday loans are made by predatory lenders who offer high-interest, high-risk loans to borrowers who need quick cash to cover short-term expenses. They’re notorious for kicking off a cycle of spiraling debt and are rarely the answer to a financial crisis.
Here are some important reasons you should avoid payday loans at all costs:
1. Interest rates are astronomical
If you financed your home or your car at 400% interest, would you think it was a fair rate? According to the Consumer Financial Protection Bureau, it’s not uncommon for annualized interest rates on payday loans to reach a few hundred percent. Borrowers should be prepared to repay 100% or more of the loan amount in interest and fees.
2. Hidden fees are excessive
There’s typically a $15 per $100 fixed fee charged for each payday loan. However, there are also additional fees that can add up quickly. Loan rollover and renewal fees, late payment fees, returned check fees, and debit card fees are the most common. Simply checking your balance on a pre-paid debit card or calling customer service could incur an additional fee.
3. Loan rollovers are costly
The large majority of people who apply for payday loans are unable to repay their loan within the typical 14-day repayment period. Unfortunately, that means they’ll have to rollover their loan to the next term…and so on and so on. Tack on the high compounded interest and fees and the debt becomes increasingly unmanageable and overwhelming, leaving almost no way of breaking the cycle.
4. You trade one financial problem for another
A payday loan may help you repair your car, buy groceries, pay your rent, but it doesn’t solve the long-term problem. The particular bill may be paid, but you’ve traded one debtor for another, and you’re still spending beyond your means.
5. It hurts your credit rating
A payday loan, even repaid on time, is not a plus on any credit report. In fact, lenders may even hesitate to lend money to borrowers of payday loans because it may be an indication of the inability to effectively manage their finances.
6. There are other options available
If you need a short-term loan, consider your other options. Borrow money from family or friends or your local credit union. Even a credit card, although not ideal, has a lower interest rate than a payday loan. As long as you pay it off within the month, or at least as quickly as possible, it could be a viable option. Can’t pay a creditor? Why not work out a payment plan over the next few weeks or months? Do you have some jewelry, sports equipment, or other items you could sell to raise money? Can you ask for an advance on pay from your employer?
In the long run, you’ll see that a payday loan is the least wise financial decision you can make. Although solving your immediate cash flow need is a priority, it’s also critical take a step back and take a look at your overall financial health, as well as your budgeting and spending habits.
4 Tips to Help Manage Student Loan Debt
If you’re a recent college graduate who took out student loans, you likely owe about $35,000. As eye-popping as that average debt figure is, you’re certainly not the only one wondering how you’ll possibly get out from under your loans. As with any difficult assignment, though, research and a well-thought-out plan will help you tackle even the most challenging of debt situations.
Making use of the following strategies will help you dig your way out of student debt. Here’s a look at where to get started.
Know what you owe
First things first: Figure out what your monthly payments should be. To do that, use one of a handful of repayment calculators. These tools let you plug in the total amount that you owe along with your loans’ interest rates and term lengths. You’ll get a better sense of how much you should be paying each month if you want to take care of your debt within a certain amount of time.
Adjust your monthly budget accordingly
Knowing how much money you’ll need to put toward eliminating your student debt each month will help you adjust your budget. That may mean making tough decisions like cutting back on nonessential expenses.
Remember: Every extra dollar you put toward your debt reduces the total amount of interest you’ll end up paying over the life of your loan, so it’s well worth the effort.
Consider automatic payments
To ensure that you make your monthly payments on time, set up automatic deductions from your checking account. The way it works is easy: Your student loan servicer simply subtracts what you owe from your account whenever your payment is due. Your lender may even offer you a discount if you choose this option, which can be much more convenient than writing and sending a check every month. Just be sure that there’s enough money in your checking account so that you aren’t hit with overdraft fees.
Switch up your repayment plan
If you’re still struggling to put money toward your student debt, consider changing your repayment plan on federal loans, which you can do whenever you want. You may, for example, opt to switch from standard repayments —which have you contributing a set amount each month over a period of about 10 years — to graduated repayment, which is when your payments start out lower and increase over time.
Extended repayments, on the other hand, give you additional time to pay back your loans, sometimes up to 25 years, if your debt is more than $30,000 and you meet certain other requirements. Other plans, aimed at borrowers whose federal student loan debt is high relative to their income and family size, are income-based. If you qualify, the payments you owe are based on how much you earn every year. Although any of these plans can ease your monthly payment, you’ll end up paying more for your loan over time than you would if you had stuck with the standard 10-year plan.
Private lenders typically have stricter policies, but it’s still worth checking to see whether there’s any way to adjust your repayment plan with them.
If you’re a teacher or a public servant, you may qualify for student loan forgiveness. Otherwise, your last resort may be opting for forbearance, which means you can stop or reduce payments for a month or two. However, because interest continues to accrue, this course of action is better avoided.
With all that said, what you definitely don’t want to do is default on your loans. When you do that, the entire unpaid balance of your loan is due immediately, and you also lose the right to defer or change your repayment plan.
Breaking down the repayment process into smaller steps will make your student debt feel less overwhelming. Although it may take several years to wipe it out completely, a carefully crafted plan will set you up for success down the road.
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