Using a loan to fund education is not wrong; however, it significantly impacts your financial life as a student and a graduate. Whether private or government loans, education loans can limit other financial goals if not well managed. Here are some approaches you can use to manage your student loans easily to ensure a healthy financial life.
Take Stock of Your Loans
Ignoring loans hurts your creditworthiness and can prevent you from accessing loans in the future. You need to assess how deep you are in debt to formulate a way to manage them. Take an inventory of your student loans by listing down the terms, payments, interest accrued, and other crucial information to get a clear picture of your loan situation. It will help you get a snapshot of your financial situation and make it easier to forge a way forward. Think of it like when you want to pay for an essay; you have to figure out how you want the essay done, when it should be ready, and where to purchase it to ensure you get the right paper.
Enroll in Income-Repayment Plan
If you have a federal student loan, you should consider an alternative repayment plan. There are several income-driven repayment plans to consider. You can opt for the income-based repayment plan, which uses a percentage of your income for loan repayment. Another option is graduate repayment, where the percentage of income cut towards loan repayment is reviewed regularly, usually every two years. This method is convenient as it gives you room to grow while considering salary changes during different stages of career development.
You can also opt for income-contingent repayment (ICR), where you commit to pay up to a maximum of 20% for 25 years, after which any balance is forgiven. Another method is extended repayment, which allows you to stretch payments over extended periods, resulting in lower monthly payments. These strategies offer affordability and a chance of forgiveness down the line. However, it means more accrued interest payments.
Consolidate Multiple Education Loans
If you have multiple loans from different services and providers, you should keep tabs on them by consolidating them. Consolidating loans puts you in a better position to keep track of your loan curve. For federal loans, a direct consolidation loan is readily available. In the case of private loans, you’ll talk to your loan servicer to check the possibility of combining multiple service loans. Before making this decision, it is good to note the changes that will happen to your repayment terms, such as interest rates, should you choose the route.
The major advantages of debt consolidation include increased payoff periods and reduced monthly payments. However, the interest rate of the consolidated loan may be higher than the interest loans for some of the individual loan plans. Ensure to compare the loan terms before choosing to consolidate the debts.
Apply Debt Avalanche Strategy
A good debt payment strategy aims at preventing interest accruing and paying quickly. The avalanche strategy is built on the principle of the relationship between interest charges and principal amount. It focuses on reducing interest payments by clearing the debts with the highest borrowing rates. The first thing is to arrange the loans in ascending order in terms of interest rates. Secondly, you allocate an extra payment amount for the loan with the highest interest.
Let’s consider a scenario where person A has two loans with 7% and 6% interest rates and is required to pay $200 each, totaling $400 per month. Instead of paying $400, person A should add an extra amount, say $80 and apply it to the 7% loan. It will drastically reduce the principle of the high-interest loan first while simultaneously paying other loans. Reducing the principal results in decreased interest.
Apply the Paydown Principal
The greatest hack to paying a loan is to repay the principal quickly to avoid charges on the interest rate. Provided you have the means, make it a priority to clear off the loan as quickly as possible. You can commit to working extra hours to have additional income and direct it towards extra principal payments. However, you should be careful with working extra hours while in school because you can compromise your academics and find yourself depending on a college essay writing service to get your schoolwork done.
If you receive a scholarship that saves you money resulting from excess loan funds, channel the funds to paying your education loan. If possible, make a habit of paying extra money on top of monthly payments to clear the debt faster. However, you should notify your loan servicer that the extra payment goes towards the principal and not future payments.
Pay Automatically
A great way to ensure you manage debt is to be on par with your monthly payments. To facilitate this, it is recommended that you set up your payments through a standing order to automatically withdraw your payments from your account every month. It ensures that you never miss to pay. Most private lenders are more than willing to give a discount to encourage people to use the approach. So take advantage of that. Remember, a slight reduction in interest matters a lot when paying loans.
Take Advantage of Loan Forgiveness
If you have a federal education loan, try debt forgiveness programs. Debt forgiveness programs allow parts of your debts to be written off. Such programs include public service loan forgiveness, which requires that the loanees be public servants and have paid for ten consecutive years. Other programs include total and permanent disability discharge for people with disabilities. If your situation worsens and you barely survive, you can file for bankruptcy, which automatically qualifies for forgiveness. You can also ask for forbearance, where you cease from paying monthly payments for a particular period. However, you need to prove economic hardship to file for bankruptcy or ask for forbearance.
Bottom Line
The key to managing education loans is to be updated on the loans you owe and their terms. Also, explore different payment methods, such as consolidation and avalanche, and leverage the power of paying down the principal to offset the debt. Don’t ignore your loans; face them and work towards managing them with the tips discussed above.