According to the Bloomberg business and markets analysis news source, student debt has now reached a catastrophic $1.5 trillion level. On a macro level the debt threatens to plunge the United States into a new recession. But the problem is taking a toll on the lives of hundreds of thousands of young adults who find that their lives are ruled by the massive amounts of money that they owe from paying for their college educations.
Some of the individuals in debt are recent grads but others finished college years ago. They can’t move forward to build families, buy homes, play online casino games or do other things that young twenty-somethings and thirty-somethings are accustomed to undertaking because of their loan obligations.
Financial analysts say that there are some strategies that can help to pay down the loans more quickly, such as:
Sign up for auto-pay, a strategy that helps you reduce your interest and put more of your cash towards the principal balance. Janet Alvarez, a personal finance expert at Wise Bread, explains that “This tactic allows your student loan servicer to automatically deduct your payment from your bank account each month. Besides ensuring that you pay on time and never miss a payment, some lenders may also give you a discount just for enrolling.”
Go beyond the minimum payments whenever possible. That’s not easy, especially since most young adults, just out of college, are up to their eyeballs just getting through the month. But, if you get a bonus from work, an IRS refund payment or some other gift, consider using those funds to drive your student loan balance down.
For instance, if you have a $20,000 loan at 6 percent interest, making just one extra payment of $100 each year would allow you to pay off your loan five months sooner over the course of a 10 year period and would save you $315 in interest.
Check to see whether you qualify to refinance your student loans. You might be able to refinance the loans if you have a steady income and good credit. When you refinance a loan you take out one new loan and use the funds from the new loan to pay off your old loans. This is a good strategy to get a lower interest rate, a new term length or both.
One example might be to refinance a 10-year student loan to one of 7 years. You’d save money on interest and pay the loan off faster but you’d be obligated to higher monthly payments. So before you take this step, make sure that you can cover those higher payments. On a $20,000 loan at 6% interest and 10 years left to pay, you’d be paying $222/month. If you refinance to a lower rate of 5% you’ve already saved $335 in interest if you maintain the $222 payment schedule.
Student Loan Planner founder Travis Hornsby suggest that borrowers create a refinancing ladder to maximize savings. He explains that “The way you do this is start with a payment you can afford pretty easily, say, a 10- or 15-year loan. Pay extra when you have extra, and you’ll cut down the amount that you owe rapidly. After a couple of years, you can refinance again to a seven-year loan, often with the same payment but with a lower interest rate. Finally, you could refinance one more time to a five-year loan before you finish paying off the entire amount.”
If you split your payments in 2 you can double the money that you put towards your loan and get it paid off in half the time. This is just one more strategy to put more money towards your loan but it may be easier psychologically.
For instance, if you get paid twice a month, take money out of each paycheck instead of one payment once a month.
Instead of paying $200 once a month, try paying $100 twice a month. Sean Moore, certified financial planner who represents SMART College Funding, says that “this little trick could knock off an entire year of payments….paying half every two weeks equals one extra payment made each year without even noticing the difference. On a typical 10-year repayment schedule, this little trick could knock off an entire year of payments (and interest).”
Some employers offer assistance to help pay student loans as a benefit. Adrian Nazari, Founder and CEO of Credit Sesame explains that “These programs will give you money toward your student loans simply for working at the company.
More and more employers are embracing an employee benefit called student loan repayment assistance. Unlike tuition reimbursement, where you get paid for going to school, these programs will give you money toward your student loans simply for working at the company.”
Nazari says that only a small percentage of companies currently offer this perk, but those that do include Aetna, Staples and Fidelity. “The amounts vary from as little as $500 per year to $10,000 per year.”
Nazari says that there are also organizations that help repay student loans in exchange for work in the nonprofit sector. “You do need to adhere to their guidelines and successfully complete the program according to their requirements in order to qualify for loan repayment assistance,” Nazari said. “But it can be a great way to give back while making a dent in your student debt.”
Snowballs and Avalanches
It’s a good idea to know your personality and tune your debt repayment strategy to your character. Willie Anderson advises clients that the two systems for debt repayment are known as the “snowball” method and the “avalanche” method.
People who need to experience wins right away might do best with the “snowball” method, says Anderson. “With this strategy, you’ll begin paying the smallest balance off first. Continue to make the minimum payments on your other accounts and put as much money as you can towards the smallest balance.”
Anderson says that once the smallest balance is paid off, the amount that was being paid on that balance can be combined with the minimum payment on the next-smallest balance, and so on. “This strategy can help keep you motivated and encouraged.” Anderson said, “since you should start to see some results right away.”
The “avalanche” strategy is for those who try to save as much money as possible. Anderson explained that “with this method, you throw the largest payment you can at your highest-interest-rate debt every month, while paying the minimum payments on your other debts.” The avalanche method is for those people who want to focus on interest rates rather than the balances to save more money overall.