As a financial consultant, student loan debt is one of the most popular debts I see but yet the least pre- planned debt. It maybe because the process of obtaining a student loan is so easy and payments seem so distant it is hard to fathom the depth of the obligations these loans could place on the borrower. Having obtained and repaid a student loan myself, I know the temptations we often encounter when faced with repayment. It is very easy to disregard the details of the debt and try to get away with only the minimum payment. If you find yourself drowned in student loan after graduation, there are four easy steps you can take to get on the right path to paying off your student loan.
1. Knowledge: The first step to making repayments is knowing how much you owe and who you owe money to. In my case, after graduation I made it a priority to understand exactly how much I owed and who I owed. I knew what my interest rates were and the terms of my loans. Armed with this information I was better able to plan repayment as discussed next.
2. Planning repayment: I will say the number one factor that helped me pay off the loan was having a plan and sticking to it. There were months I did rather take some of this payment and use it towards a luxury item but I knew I had made a commitment and I chose to stick to the plan. Using a financial calculator (templates can be found with most spreadsheet programs); I was able to estimate how much payment I should make to pay off my debt in a year. My debt was less than $10,000 and paying it in a year was doable for me. Most student loans are automatically calculated over a ten year period. You can ask to extend the pay by consolidation, graduated payment, income based payment or long term payment. However, remember when you do this that even though your monthly payment is decreased, the total cost of your loan is increased. Moreover, make sure that if you make extra payments, the money goes toward the principal and the loan terms do not include overpayment penalties.
3. Follow up: In order to stay motivated, it is important to follow up on your plan. I often evaluated my plan on a monthly basis to see how I was doing. Seeing your principal balance going down is an encouragement to keep up with the plan. Some months I made minor adjustments to my payment plan.
4. Avoid late payments: One big thing to avoid is late payments. The costs of paying your student loan late are too high. You negatively impact your credit history; risk an interest rate increase and even worse risk capitalized interests. Capitalization is the addition of accrued interest to the principal increasing the total cost of your loan. When interest is capitalized the total outstanding balance is increased which means your interest payment will go up because of your increased balance. If you fall into a chain of making too many late payments it will be very hard to dig out of that hole.
Taking advantage of early payment also qualifies you for a credit of 1% of your principal for the first three years. Not all lenders offer this so you might want to check with your lender. Using a direct debit could help you avoid late payments and save you .25% on your interest rate. If you currently pay 6.8%, you could pay 6.55% with direct debit.
I definitely do not regret my decision to pay my student loan early, the financial freedom that comes from having less debt is worth the sacrifice. My student loan served a useful purpose: I am grateful I had them when I did because they helped me fill the gap of getting a good education.