I am not a finance blog, but (I have experience in paying off these damn loans and I might as well pass it on to the youngins who could benefit from this.)
Firstly, go through the work to make your own long-term plan for payment. The plans offered by loan servicers are extraordinarily underwhelming if you want to pay everything off before you hit thirty, or in some cases, if you want to ever pay it back all back at all. Remember that for as helpful as the loan servicer may present themselves as, they have a vested interest in squeezing as much interest out of you as possible. Set your own budget.
If the mention of a budget sounds scary to you — it does involve a lot of numbers — (link to Jenna’s budgeting video).
Some important information to gather before making your budget includes the number of loans you have, the amount you owe per loan, the interest rate per loan. If you don’t already have a budget that keeps track of your income and living expenses, now is a good time to create that too. It will help inform the student loan budget.
When budgeting for your loan repayment, make sure that you pay more than your obligatory monthly payment, if possible. Every cent that you don’t put into your loans now is a cent that will earn interest later.
This means that if you are in school, start paying now! Target the unsubsidized loans, since those are the ones that collect interest first, and take advantage of the six-month grace period after graduating to pay as much off as you can without interest.
As for how to set up the most effective payment plan…
DON’T pay general amounts of money split between all loans. You want to target and pay off specific loans one at a time. Getting rid of a specific loan reduces your total principle, and that’s more helpful for reducing interest in the long run. It’s also more helpful in lieu of the next piece of advice.
At first, you might be tempted to target loans from lowest total principle to highest. This is called the “snowball” method of paying off debt. While it can make you feel good at the beginning of your payments when it’s easy to remove the smallest loans, it’s not nearly as effective as another method — the “avalanche” method. Targeting your loans in order from highest interest rate to lowest will ensure that you pay the lowest possible interest amount over time. The difference between a 5% loan and a 4.5% loan over even a single month can be staggering.
Unhelpfully, your loan servicer might do small, unobtrusive things to guide you into the most expensive long-term payback as possible. This may include listing general payment more obviously than targeted payment, listing the interest rate for all of your loans as 0.0% during grace periods so that it’s more difficult to figure out which you should target first, or offering your lowest interest rate loans first hoping that you’ll just click the first option. Just be aware of this.
If your monthly payment is less than the interest you earn every month, and if you can’t increase payment, I’m really sorry. There’s not much that can be done in that sort of situation aside from staying on top of your monthly payments and searching for a miracle.
Finally, if you can’t follow all of this advice — some of it is MUCH easier to follow if you have certain privileges, like being able to live with your parents for a bit — don’t feel bad, okay? You’re doing your best with a tough situation. Many of us were pushed into getting an increasingly expensive and increasingly unhelpful degree from a young age.
In my case, I don’t regret the good experiences I had at college, but I do wish that other people weren’t financially crippled for life because of their loans.
Good luck out there, guys.
I know this article wasn’t my usual content, but since I’m about to behead the beast that was my loans, I wanted to give other people all the useful tricks I learned along the way. If you find this helpful, then you can support me by buying me a Ko-fi or purchasing Shadow Herald, my debut novel.
There won’t be an article next week, since I’m taking off time to get through Yule. Thank you, and have a lovely holiday season!
J.L. Heeren 