Guest Post: Keys to Successfully Managing Student Debt After Graduation

We have a guest post today from David Chen, the blogger behind MillennialPersonalFinance.com. He writes about optimizing your personal finances on his growing blog.  David is currently working to pay down student debt one paycheck at a time.

 

The first real financial challenge for many new college graduates is successfully managing their student debt after graduation.  On average, student loan payments account for one-fifth of a new graduate’s monthly budget. As the average 2016 college graduate has $30,000 in student loan debt, the total cost of their education will be even higher once interest charges are factored in. After factoring in rent, utility, and insurance payments, the monthly student loan payments might be difficult to pay in full.  Thankfully, several repayment methods exist to help graduates afford their student loan payments, making student loans one of the most flexible financial loans available when they enter repayment status.

 

Refinancing

If you have any private student loans, refinancing will be your best option. If you are struggling to afford your current monthly payment, refinancing allows you to lower your student loan payment by extending the repayment period beyond the standard 10 years.  The longer repayment period will result in more interest charges, so a refinanced student loan can cost more overall, but, making more than the minimum payment when possible will keep additional interest charges to a minimum.

 

Any borrower can enjoy a smaller burden as the second benefit of refinancing is the possibility of receiving a lower interest rate.  Even if you do not extend the repayment terms and only apply for a lower interest rate, your monthly payment will be smaller because you will be paying less interest each month.  Over the course of several years, a smaller interest rate can literally save you thousands of dollars.  Refinancing isn’t exclusive to student loans. Many homeowners refinanced their mortgages a few years ago to take advantage of historically low-interest rates.

 

When choosing a refinancing lender, you will want to choose one that does not charge origination or application fees.  Plus, if you plan on paying off the loan ahead of schedule, you will want to make sure the lender doesn’t charge any prepayment penalties.  Don’t worry, most do not charge any of these fees.  You will have the option to apply for a fixed or variable interest rate starting at 2.23% and repayment terms can range from 5 years to 20 years.  

 

Income-Based Repayment

Most federal borrowers with limited incomes will qualify for one of several income-based repayment plans.  These plans currently limit monthly payments to 10% of a borrower’s adjusted gross income and any remaining unpaid balance is forgiven after 20 or 25 years of payments.  Government employees and select non-profit employees can qualify to enroll in the Public Service Loan Forgiveness program that will forgive any unpaid balance after only 10 years of payments.  Unfortunately, private student loans do not qualify for income-based repayment.  

 

Automatic Payments

This perk is available to both federal and private borrowers and no additional paperwork is required to enjoy it.  The only thing any student loan borrower needs to do is designate a bank account to withdraw the monthly student loan bill from each month.  By doing so, most banks will reduce the interest rate by 0.25%.  While this might not seem like a lot, the savings will add up over the course of the repayment cycle.  And, it isn’t every day that lenders offer discounts.

 

Not only can automatic student loan payments help reduce your monthly payment, but, they can also prevent late fees.  It can be real easy to forget to pay a bill when you are busy with life.  A missed loan payment can incur late fees and also negatively affect your credit report.  As long as there are sufficient funds in your bank account on the scheduled payment date, you will never have to worry about missing a payment again!  In addition to scheduling automatic student loan payments, many utility and leasing agencies offer the same service to help you prevent being charged late fees.

 

Prepayment

If you have been blessed with a respectable salary and can afford to make more than the minimum monthly payment, “prepaying” your student loans can be the most valuable key to successfully managing debt.  For example, a graduate with $16,900 in student loans at 6.8% interest will approximately pay $12,293 in interest with a standard 10-year repayment plan.  By paying an additional $33 monthly, they can repay the loan one year early and save approximately $1,318 in interest charges.  The savings grow even faster the sooner you plan to pay off the loan.

 

Prepayment isn’t exclusive to the original student loans that were issued as a college student.  Most of the leading refinancing lenders will allow you to pay off a loan early without penalty fees.  Even if you cannot pay ahead on your loans at the moment, this is a very useful card to hold until you eventually do receive a salary increase or reduce your other monthly expenses.

 

David would love to hear your feedback and suggestions. David can be reached at david@millennialpersonalfinance.com.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.



28 Comments

  1. I’d be careful with refinancing- between fees, lengthening the term, and potentially higher rates, refinancing can burn!

    Also, income based repayment is a great way to go deeper in debt- thanks to this program, some grads are making payments so small that they don’t even cover interest charges.
    Daniel Palmer recently posted…How Much Money Does It Take To Live On Your OwnMy Profile

    • Great point! I’d be careful with re-financing and any methods that reduce your monthly payment but may make the payment terms longer.
      I particularly liked the prepayment method above. I was on a meager budget and saved like crazy until I paid off the last cent of my student loan. I’m glad all of that is over.

  2. So as someone who used to have student loans, here is my advice, stetch out low interest loans as long as possible using the longest repayment plan. Student loans are an extremely valuable asset to have, as up to $2500/year in interest can be deducted from your taxes, reducing your adjusted gross income. This is much more valuable than having itemized deductions (such as home mortgage interest).

    If you have high interest credit card debt like I did, having a much lower payment helps you speed up the repayment of the credit card debt. If your loan is under 5%, I am of the opinion you are better off investing in a low cost index fund instead of repaying your student loan. I would shoot for 30 year repayment in that case.
    FinancePatriot recently posted…Planning our Puerto Rico dream vacation; 7 nights, 4 guests, Kayaking, El Conquistador resort, points and miles, $2000My Profile

    • Thanks for sharing your perspective Finance Patriot!!! It definitely makes sense to pay off your highest interest rates first if your into the debt avalanche method 🙂

  3. Great tips! Some lenders also let you choose which loans your payments go towards. For the longest time my lender would take my payments and pay off the loans with the smallest interest rates (more money in their pockets–those jerks!). But now I can choose how to apply funds to my loans so I can pay them off more quickly. Woop woop!
    Mrs. Picky Pincher recently posted…Saving Green by Being GreenMy Profile

  4. I’m personally all for paying off debts as fast as possible! Anyone you owe money to will do anything they can to squeeze more money from you! For instance, I was a few days late ONCE, and then went I tried to set up auto pay for those loans, I was told I didn’t qualify for autopsy BECAUSE I had had one late payment! How does that make sense? The one way to ensure I’d never be late paying again, I’m not allowed to do because I once paid late? So ridiculous! Pay them off quickly and don’t count on the federal forgiveness program; who knows what will happen with that?
    Mrs. COD recently posted…The Death of ShoppingMy Profile

  5. I graduated with $20,000 in student loan debt. I used the debt snowball method to pay it off. It sucked and I had to sacrifice things, but I survived.

    While the post is helpful in terms of giving you options, I have to agree with Daniel. Refinancing is not a great idea. The same goes for consolidation. Avoid those if you can.

    Personally, I’m not as familiar with income-based repayment. However, I will say this. If you can’t guarantee a job when leaving college with a salary that can pay off your loans, why the hell would you major in that subject? I mean seriously. Just my 2 cents.

    Great post. Love the conversation it sparked.
    Dave @ RunTheMoney recently posted…5 Key Takeaways from my first Half MarathonMy Profile

    • Thanks for sharing Dave!!! I do wonder at times why people major in things that don’t earn them an income and they take on a ton of debt. Seems like schools should be incentivized to teach subjects that earn people jobs if they are required to take out loans 🙂

  6. The thing is I can’t really relate to student debt. Almost half of my tuition was paid through scholarships. I was lucky enough that my parents paid for the other half. (Keep in mind that this was in Canada where tuition is much cheaper).
    I had some friends who went through med school and came out with like $200k in debt. I don’t really think it was worth it though. Family doctors make $200k in Canada, which after taxes is like $120k. Then they have to pay for office rent, a secretary, and it turns out that they don’t make much more than middle class managers in big corporations. (not to mention the debt)
    Troy @ Market History recently posted…Will the S&P 500 consolidate within a range in the next few months?My Profile

    • I was really lucky that I too didn’t have any debt after school. But I can definitely see how it would add up if you went to med school or some other hiring learning type credentials.

  7. I was lucky that between my parents and the Army, I had no student debt when i graduated. I just owed 4 years to the Army, ha! Managing the cost of college has certainly changed. In less than 10 years my daughter will be there. We are actively saving for it. Good article.
    ReachingTheCrest recently posted…How Much Do You Need To Save? Part 1My Profile

  8. Paying off student loan debt is no easy task! How to pay it off should depend on what type of loans you have. There are different repayment options for federal loans compared to private loans, with federal loans being the more forgiving type of loan.

    The strategy you take should consider lowering your interest rate (refinancing as you mentioned) and making sure your monthly payments are bringing down your principal, not just paying interest.

    • Thanks for sharing Robert!!! Paying off student loans is definitely not easy. I have friends that are still trying to pay them off at this point and it’s 15 years later.

  9. This is such a good issue to talk about! My husband and I are so thankful and lucky that we were able to pay off our student loans this past year. But man, it’s crazy how expensive education is! We consistnely over paid our student loan payments for the first 5 years, and then eventually used some excess savings to pay one off, then we saved some more, and paid off another, and saved some more and then finally paid off the third.

    I am in the healthcare field, and intermittently there are government repayment programs for loans, but the terms are very specific, so you have to be careful and make sure you are willing to fulfill your part of the deal!
    Katy recently posted…5 frugal thingsMy Profile

    • Thanks for stopping by Katy!!! College costs have definitely risen a ton in recent years. I am definitely glad that I’m out of school now otherwise I’m not sure I’d be able to afford it now 🙂

  10. Hey Mustard,
    I don’t know about it more but I am always curious to know more information about every topic. But in actual I was looking for student debt information from few days but couldn’t find this information. Thanks for sharing this brilliant article with us.

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