Coping with College Loans
Paying them down and managing their financial impact.
Is student loan debt weighing on the economy? Probably. Total student loan debt in America is $1.5 trillion, having tripled since 2008. The average indebted college graduate leaves campus owing nearly $40,000, and the mean monthly student loan payment for borrowers age 30 and younger is about $350.[1,2]
The latest Federal Reserve snapshot shows 44.2 million Americans dealing with education loans. The housing sector feels the strain: In a recent National Association of Realtors survey, 85% of non-homeowners age 22–35 cited education loans as their main obstacle to buying a house. Eight percent of student loan holders fail to get home loans because of their credit scores, the NAR notes; that percentage could rise because the Brookings Institution forecasts that 40% of student loan borrowers will default on their education debts by 2023.[1,3]
If you carry sizable education debt, how can you plan to pay it off? If you are young (or not so young), budgeting is key. Even if you get a second job, a promotion, or an inheritance, you won’t be able to erase any debt if your expenses consistently exceed your income.
After you begin to live within your budget, you can use a few strategies to whittle away at college loans:
The economy and budget permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance.
You can use your tax refund to attack the debt.
You can hold off on a major purchase or two.
You can sell something of significant value—a car or truck, a motorbike, jewelry, collectibles—and turn the cash on the debt.
Now, in the big picture of your budget, you could try the “snowball method” where you focus on paying off your smallest debt first, then the next smallest, etc., on to the largest. Or you could try the “debt ladder” tactic, where you start by attacking the debt with the highest interest rate. Either tactic could permit you to gradually devote more and more money toward the goal of wiping out your student loan balance.
Even just paying more than the minimum each month on your loan can help. Making payments every two weeks rather than every month could also have a big impact.
If a lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments may help, too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move by lowering the interest rate on a loan by a quarter-point.[4]
What if you have multiple outstanding college loans? If one of them has a variable interest rate, try addressing that one first. Why? The interest rate on it may rise with time.
Also, you might consider combining multiple federal student loan balances into one. While this option requires a consolidation fee, it also leaves you with one payment, perhaps at a lower interest rate than some of the old loans had. If you have multiple private-sector loans, refinancing is an option. Refinancing could lower the interest rate and trim the monthly payment. The downside is that you may end up with variable interest rates.[5]
Maybe your boss could help you pay down the loan. Some companies are doing just that for their workers, simply to be competitive. According to the Society for Human Resource Management, 4% of employers offer this perk. Six percent of firms with 500–10,000 workers provide student loan repayment assistance.[6]
To reduce your student debt, live within your means and use your financial creativity. It may disappear faster than you think.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations
1 - studentloanhero.com/student-loan-debt-statistics [5/29/18]
2 - cnbc.com/2018/05/24/students-would-drop-out-of-college-to-avoid-more-debt.html [5/24/18]
3 - cnbc.com/2018/04/19/student-loan-debt-can-make-buying-a-home-almost-impossible.html [4/19/18]
4 - nerdwallet.com/blog/loans/student-loans/auto-pay-student-loans [2/21/17]
5 - investorplace.com/2017/06/how-to-navigate-your-student-loan-debt [6/6/17]
6 - shrm.org/resourcesandtools/hr-topics/benefits/pages/student-loan-assistance-benefit.aspx [6/14/17]
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.