The average student loan debt is upwards of $30,000 for today’s college grad. How you can possibly establish solid financial footing for the future when you’re struggling to keep your head above water in the now?
Here’s a five step plan to help you dig out from under student loan debt.
Make payments no matter what. You have to make at least your minimum monthly student loan payments in order to maintain your credit,avoid fees, and hold onto the interest rate your loan offers. American Student Assistance, a non-profit group, estimates that 60% of people with student loans miss payments and let their accounts fall into delinquency.
There may be months when missing a student loan payment feels like the easier path, but keep this in mind: You’ll find yourself in even bigger financial trouble if you miss your student loan payment. Here’s why.
- Private student loan missed payments could be reported to credit bureaus once the payment is 30 days late.
- Late Federal student loans may be reported to credit bureaus once they’re past 90 days due.
- Late payments bring your credit score down (though how much depends on what your credit score was before you missed the payment).
- Late payments on your credit history (especially recent ones) make it tough to get approved for other credit products, including a mortgage, auto loan or credit card.
- If you do get approved for a loan with a history of missed payments, don’t expect to borrow at a low interest rate.
- Many private student loans charge higher interest rate once you miss a payment.
Know your loan options. If you don’t know whether your student loan interest rates are competitive, do some research to understand if you should consider refinancing student loans. Betsy Mayotte, director of regulatory compliance for the ASA says to add up exactly what you owe, and to whom so you can look into potential repayment leniency programs. Federal student loans offer lots of repayment options based on your income, along with some repayment plans designed for teachers, attorneys,health care workers, and professionals who work for non-profits. Marketplace lenders like SoFi and Lending Club also offer lending options that may help borrow for less than what you currently pay in interest for your student loans.
Use leverage to your benefit. You want to get rid of your student loan debt quickly, but make sure it’s your most costly burden. If your student loan rates are 4% but you have credit card debt that costs you 12% interest, for example, you’ll fare better by making the minimum payment on the student loan and being more aggressive with the credit card debt. Simply put, the credit card debt costs you more to carry–even if it’s just $5,000 and your student loan debt is $20,000.
Additionally, some of your student loan interest rate payments may be tax deductible; interest you pay on your credit card debt is not. Once you pay your credit card debt off, you’ll have free up more money to pay down student loans. Then, start using cash so you don’t charge your way back into debt.
Focus on improving cash flow. You can improve cash flow if you’re willing to work for it. There are a lot of ways to come up with more cash: Take on a second job, minimize your costs of living, and/or pay off costly debts.
Start small; identify a fixed number of additional cash you can realistically come up with each month. Let’s say it’s $200. Each month, you can choose to save it, or put it towards your most costly debt. Either way, you’re investing in your future: The emergency savings fund reduces the risk that you’ll have to charge an unexpected expense on a credit card, which could end up costing you even more when you factor in credit card interest charges. Paying down the debt gets you one step closer to reducing what you owe.
Invest in your retirement. Why would you invest in your retirement account when you need money to pay down your student loans? Three reasons: Compounding interest and the power of time, and the tax benefits associated with retirement contributions. You can put up to $18,000 a year into your 401(K) plan, or $5,500 a year into a ROTH or IRA. Both should help to lower your adjusted gross income (AGI), which could reduce how much tax you owe. Plus, whether your student loan interest payments are tax deductible is based on your income. If you’re single, you’ll have to report less than $80,000 to taxable income to claim it.
As far as the power of compounding interest, the little bit you put away each month into your retirement–especially if you invest into stocks or low cost mutual funds should grow over several years. Yes, it may take years to resolve your student loan debt. But once you do, you’ll be glad that you invested simultaneously, so you have a nice chunk of cash waiting for you.