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How to Pay Off Student Loans Now

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How To Pay Off Student Loans NowLast week we discussed the darker side of student loan debt as well as various strategies for staying out of it in the first place.

But what if you’re a recent graduate already carrying an over-sized student loan balance, is there hope for you?

Absolutely, but it won’t be easy.

Exactly how difficult that will be will have a lot to do with how much debt you have; the larger the loan balance the tougher the choices you’ll face.

Why you need to pay off student loans as quickly as possible

When you finish college it’s natural to want to get on with your adult life as soon as you can. You want a new car, a place of your own and to begin experiencing some of the adventures you couldn’t afford when you were in school. A few years later you might be looking at marriage, buying your first home, and for some, having children or starting a business. All will cost money, and some will require new loans.

In addition, careers and jobs aren’t as stable as they once were. Even though you have a job upon graduation, it’s hardly inconceivable that you might be unemployed just a year or two later. If that happens, you’ll need all of your financial resources to deal with the crisis at hand.

Student loans will interfere with all of that, and that’s why you should pay them off as soon as possible. Not only will they be a drain on your future cash flow and your ability to deal with a job loss, but they could also limit your ability to borrow money to buy a home or finance a new business.

How quickly you’ll be able to pay off student loans will depend on both the size of your debts and on your personal situation upon graduation.

Loan size

Though the average student loan debt is just over $25,000, the amount owed can vary by individual, anywhere from a few thousand dollars to well over $100,000. If your debt is at the lower end of the range, you can manage the pay off without making too many sacrifices. But if your debt is into the tens of thousands, you’ll need to make sacrifices, some of them life changing.

The bigger your student loan is, the greater it’s ability to interfere with your future plans, and the greater the need to get rid of it as soon as possible. You may be able to blend the pay off of a $10-20,000 student loan into the rest of your financial life, but if you owe more in student loans than you earn in salary, you’ll have to step out of your comfort zone to make it go away.

Your employment status

We hear and read a lot these days about graduates having student loan troubles, and though much of that has to do with loan size, employment is a more common problem. Let’s face it, it’s hard to pay back a large debt when you’re either unemployed or under employed. And more grads are falling into either category than ever, which is yet another strong reason to pay off student debt as soon as possible.

If there’s no work in your field of study, or you can do no better than minimum wage, there are certain student loan relief programs that may help you. It’s a long shot that you’ll qualify for any of them, and if you don’t you’ll have to be prepared to roll up your sleeves and get busy.

Strategies to pay off student loans

The best time to accomplish this is when you first get out of school. Life becomes more complicated as the years pass and as they do your ability to pay off the loans will decline. Here are ways to make that happen. You should easily be able to find an extra $10-15,000 per year to pay toward your student loans.

Housing on the cheap. There are several choices here: 1) move back in with your parents, 2) rent a room close to work, or 3) share a house or apartment with one or more roommates. If the choice is renting an apartment by yourself for $1,000 per month, or sharing a small three bedroom house for $1,200 with two roommates at $400 each, you’ll have an additional $600 per month, or $7,200 per year, to pay toward your student loans.

Employment plus. Take a second job and dedicate it entirely toward the pay off of your student loans. Even if you only make $8 an hour, if you work 20 hours per week, you’ll earn $160, or about $8,000 per year. Even allowing for taxes you’ll still have a good chunk of money to put toward your debt. And two bonuses: 1) with a part-time job you’ll spend less time at home with your parents or roommates, and 2) since you’ll be working, you won’t be out spending money!

A “beater” to the rescue. Buy the cheapest car you can afford to buy without taking a loan. If that’s a $2,000 beater, then that’s’ what you buy. While a new car may be very desirable after graduation, buying it with a loan will just add more debt to an already substantial pile, and cut down on the amount of income you’ll have to devote to paying off your student debt.

Staying out of other debt. The last thing you want to do while paying off your student loans is to run up your credit cards or take other loans. That’s just a matter of exchanging one form of debt for another.

You can use all or a combination of several. How far you’ll have to go will depend on how large your student loan debt is and how much you want to make it go away. But the sooner you do, the better the rest of your life will be.

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Do you think it’s a good idea to make paying off of student loans a high priority after graduation? Share your thoughts.

photo by Victor1558

College Loans are Keeping Students In Debt

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Here’s a sad reality: a college education has become synonymous with debt.

Have you noticed the stunning number of twenty-something’s who are saddled with out-sized debt burdens? Most are college graduates.

This shouldn’t come as a surprise. According to the Project on Student Debt, the average debt from student loans carried by college graduates in 2010 was $25,250. Given the relentless rise in college costs, we can expect the number to be higher for those who have graduated since.

And the number above is just an average. It’s all too common to hear of students in debt to the tune of $50,000, and even $100,000 or more.

Student loans versus other debt

After decades of being told that student loans are “good debt,” many are finding that – good debt or not – it’s still debt. Even with deferrals, low interest rates and low monthly payments, the loans must be repaid. And that means a drag on future income and personal options, usually for a very long time.

But student loans have some other features that make them more restrictive than other forms of debt. Since they’re unsecured, you don’t have an underlying asset like a house or a car to sell if you want to pay off the debt. In that regard they’re more like fixed credit cards. And if your financial situation gets really bad, you can’t discharge them in bankruptcy.

Remember, no matter how bad your financial condition, there’s no way out of a student loan.

Matt’s note: there are student loan relief programs applicable for specific circumstances.

What if you don’t finish college?

If you finish college and get your degree, though buried in student loan debt at least you’ll have earned the sought-after credential that will provide you with an opportunity to earn an income that will enable you to payoff your debt. But what if you don’t finish?

Nearly half the students who start college don’t finish.

There are all kinds of reasons why: family or personal issues, burning out on school, or even being spooked by the rising level of debt they’re getting into. If they took out student loans during their time in school they will still have to pay them back even though they didn’t graduate. In many cases, they won’t have the earning power, not having a degree.

Since there are no limits on how much a student can borrow, a non-grad can easily accumulate a five figure debt load in just a couple of years in school.

Debt begets more debt

One of the darker aspects of education debt is the way it can set the student up for a lifetime of indebtedness. Students in debt usually become adults in debt – the pattern is established early.

Loans are taken to pay for education, but along the way credit cards are often used to cover what student loans won’t. At graduation, new cars are usually purchased to commute to the new job, bringing another loan. At 21 or 22, a new grad enters the work force armed with a college degree, credit card debts, an auto loan, and copious amounts of student loan debt.

This isn’t to say that you can’t get out of debt from this position, only you’ll have to overcome a mountain and an entrenched habit to do it; and habits are not easily broken, especially when new debt is often needed to cover new expenses because new income is committed to pay for old debts.

You have to break the debt habit!

The debt-free way to a college education

Given the debt hole that many college students get into, and the uncertainty of the job market, it’s worth exploring less expensive ways to earn a degree. You may be able to get a college education without going into debt to do it, or at least keeping debt to a minimum.

Community colleges. Most areas of the county are served by local community colleges that you can attend for your first two years. Not only are they far less expensive than traditional four year colleges, but they typically award an associate’s degree that’s a solid advantage if you decide that you’re done with college after two years. If not, you can go on to a four year school.

“Commuter colleges.” Living on campus raises the overall cost of a college education substantially – and the debt that’s used to pay for it. If you attend a college in your local area you can commute to it, eliminating the need for room and board costs.

Work-study. For what ever reason this form of getting an education has fallen into disfavor. But with the cost of college rising to levels that are beyond middle class pocketbooks, it’s time to rediscover and embrace this once beloved route. Work-study, where you work at a paying job in a related field while you’re in school, will reduce the need to borrow money to pay expenses in college. It can work especially well for community or commuter-college students, combining income earning with lower education costs.

Conclusion

College costs continue to rise, keeping students in debt at ever-increasing levels. Once you have those debts the only way to eliminate or reduce them is to pay them off. And the larger the debt, the more difficult the repayment. Minimizing or avoiding them upfront is the best course of action.

Do you have a student loan story to share?

Matt’s note: Betsy and I still owe over $50,000 of student loans; and it’s the only debt we have. They take a long time to repay, and neither of us are working in our field of study any longer.

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How To Pay Off Debt With a Lump Sum

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How To Pay Off Debt With A Lump SumThe question:

DFA reader Denise asked:

My husband will be getting a lump sum next week of about 110 k. This is a settlement from a workers comp case. It’ll change a lot of things for us. For one. We will be able to pay off almost all debt (mostly medical bills) and another is our monthly income will be reduced by $860 a month. Yikes! We also have a car loan with about 15k left and my student loan which is in collections and is being garnished from my paycheck each week. not much I can do about that. Another 30k plus to go!

My question is basically what is the best way to go about paying off the car loan which is financed at over 20%, to make the most positive impact on our credit report? Ideally we would love to do it within six months.The answer:

Thanks for your question Denise.

As I see it you have several options:

  1. pay off the car in one lump sum
  2. bank the money and continue making regular payments until the car is paid off
  3. start paying your student loans.

Let’s take a closer look to see what works best for your situation.

Lump sum aka windfall

Today the term windfall refers to a piece of unexpected good fortune, typically one that involves receiving a large amount of money, but originates from an apple or other fruit being blown down from a tree or bush by the wind.

Windfall’s can be – and should be used as – great kickstarts for getting out of debt!

Your credit score

You mentioned your credit score which shows you are concerned about how to make it higher.

I have my own opinion about credit scores, but we’ll set that aside for now to best answer your question. (Use this credit score resource to help find or improve your score.)

The best way to improve your credit score will be to get your student loans current and out of collections. Use the combined resource of your monetary lump sum and the flexibility of repayment offered by your student loan guarantor. (Use this student loan resource to find your best solution.)

Your auto loan

Since you’re paying around 20% interest on your auto loan you want to get that paid of as soon as possible.

To give you a better idea of how much this loan is costing you let’s take a look at an example amount being financed at 20%.

According to BankRate.com’s auto loan calculator, a 4-year $15,000 loan at 20% means a $450/month car payment with $250 of that going toward interest. At the end of this loan you will have paid nearly $7,000 in interest!

That is unacceptable, so pay it off as soon as possible.

Conclusion

If it were me I would use the lump sum in this order:

  1. pay off the medical bills
  2. get the student loans current
  3. use the rest to pay off (or down) the auto loan.

Once you have the auto loan paid down (or paid off) you can set up automatic payments to your student loan guarantor so you no longer have to worry about late payments, collections, and wage garnishment.

Note: although it may not apply to this situation, others reading will also want to consider investing some of the lump sum. I usually recommend passive investing strategies.

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photo by Steenbergs