Your college education was an investment in your future — opening career doors and providing greater earnings potential. But if you’re still paying off your student loans, that bright future may be stalled. The Federal Reserve Bank of New York currently puts the total balance on all student loans at over a trillion dollars.
The New York Times estimates the average student loan to be $23,300 for students who graduated in 2011 (with 10 percent owing more than $54,000 and 3 percent more than $100,000) — up approximately $15,000 since 2003-04.
Repaying your student loan is vital to your financial future. Here are seven tips for paying your students loans faster:
- Track your spending and make a plan. If you’re on a tight budget, the first step is to track your spending habits. Know where your money is going. It will help you think about what’s important, rather than just spending on anything that comes along. Of course, you know the next step is cutting your expenses and setting a budget. Include an Emergency Fund in your budget for the unexpected. Savings and retirement should eventually be part of this budget. That’s why it’s critical to pay off your loans and eliminate this debt now. Try mint.com — a website to help you track spending and create a budget.
- Paying your loans off early has a big financial reward. With a loan of $23,300 at 4.5% interest, if paid off over 20 years at $147.41/month, you will have paid $12,077.35 in interest. If you pay that same loan off in 10 years, your payments are $241.48/month and your total interest paid will be $5,677. So, if you can find a way to funnel an extra $94/month to loan repayment, you will be debt free ten years sooner and will have saved $6,400.13 in interest payments. Try finaid.org/calculators/loanpayments.phtml — to plug in your own numbers.
- Repay variable private loans first. The current interest rate on a variable loan may be low. In fact, it may be lower than your federal student loan rate. But as the economy improves, that rate can increase at any time — making your monthly payments higher.
- Federal loans are real and have to be repaid. Some of these loans allow you to set up your payments based on income. Again, making the smallest monthly payment is a mistake. This means more payments over a longer period — and more total interest paid.
- Consolidate if it makes sense. If you have multiple federal loans, consolidating may enable you to lock in an interest rate that’s lower than the rate on each individual loan. If your federal loan already has a fixed rate, the only real benefit of consolidating is that you would only have one payment to track.
- Make automatic online payments. All government loans and some private loans have a slightly lower interest rate if you automate. You won’t miss a payment this way, and you can still make one-time additional payments if you have unexpected extra cash.
- Employer help with student loans. As part of a compensation package, some employers offer assistance with student loan repayment. There are established programs in some fields such as nursing, government, military, teaching, and public service. In addition, some private employers have programs of this type in place.
The burden of repaying student loans can seem daunting. Make a plan. Focus on early repayment. Financial freedom is waiting.