As a millennial, growing up, adults and teachers alike always told us to do well in school in order to get into a “good” college. After putting in countless hours studying in High School to get good grades, participating in extracurricular activities, and working to be able to hang out with friends, we finally get the letter saying, “Congratulations! You have been accepted <insert college name here>.” Fast forward 4-5 years later, 3 months from your college graduation, and you’re hit with “Congratulations on graduating! Your first loan payment is due in 6-9 months.” Huh? What? Loan payments? What are those?
Q2 of 2012 was a historic quarter in US History. Do you know what milestone was achieved? No? The Student Loan debt total nationally surpassed $1 TRILLION. As of November 2015, the total is over 1.3 Trillion and is growing $2,726 every second according to Market Watch.
With this growing epidemic, something needs to be done. Depending on your major in college, you will either graduate and be able to get a well paying job, or you will be working to make ends meet until you find that well paying job. In either case, we need to face the fact and just pay the damn thing off. The quicker we pay our loans off, the quicker we can move onto the next milestone in our lives, whatever that may be.
What Do I Have to Pay?
The first step in paying off any debt is figuring out how much you owe. To do this for Student Loans, the federal government has a convenient website to find all federal loans associated with your social security number and name (does not include private lenders like Sallie Mae). This will show you how much you owe and who services your loans. This is also known as a Loan Servicer. Some of the big services include Great Lakes and CornerStone. Once you have gathered the necessary information and find that we owe more than 30,000 in Student Loans, you can now start throwing money at it and hope it goes away. Not so fast! More than likely, the total is a sum of smaller individual loans disbursed at separate times over the course of the last 4-5 years. These smaller loans could have varying interest rates depending on the time the loan was taken out. We will need to take these interest rates into consideration when making payments. More on that later. We should also consider subsidized vs unsubsidized loans. We won’t get into depth on the differences here, but essentially subsidized loans are loans where the government defers accumulation of interest on the loan and unsubsidized is the opposite.
Interest is how the big banks make their money. They charge a yearly rate for the amount of money that is still owed to them. Remember the smaller loans we discussed earlier? Each one of these has an associated interest rate. Typically, they are not the same for each loan. The next step is to rank the loans from highest interest rate to lowest interest rate. Don’t worry about the amount for each loan. This is because the higher the rate, the more money you will be paying to the bank rather than paying down the loan itself, aka the principal. Once the loans are ranked, there are two schools of thought here, the snowball method or the avalanche method.
The snowball method caters more to your psychology than your financial health. The snowball takes the idea of aggressively paying of the smallest loans first and working your way to the bigger ones. This does not take into account interest rates, but purely the amount of the loan. After paying off a loan, we are feeling good and have the drive to pay off the next loan and just as aggressively.
The avalanche method takes more of your financial interest in mind, because you are accounting for the interest rates. With this method, you follow your loan rankings from top to bottom until the loans are gone. In the long run, this method will apply more money to the principal because you will be paying less in interest.
Here is a link to learn more about the Snowball vs Avalanche methods.
Another way of approaching Student Loans is to consolidate the smaller loans into one larger loan with one interest rate. This method is not available for everyone, so a little research will need to be done on your part. Obviously the previous methods will not work with consolidation, but because there is only one loan and one interest rate you only need to worry about paying one source and not making multiple payments to 4 different places or however many loans you have.
There are many companies out there that entice people to consolidate their loans with them. An example of this would be SoFi. They offer perks and rewards for re/financing with them, but the reality is that they may not be the best company to service your loan. When it comes to paying off loans, you’re looking to pay the loan off in the most efficient way, not be offered perks where you end up spending more money and contributing less to your loans.
I recommend consolidation of your loans with a company you already have a loan with or that has the majority of your loans. This allows most of the heavy lifting to be done on the servicer end without having to worry about it. If taking this route, take into consideration the average of interest rates. If your interest rate for the large loan is larger than the average or the highest interest rate of individual loans, it would not be recommended to consolidate the loans. Depending on the servicer, there are flexibility options where you can consolidate some loans and exclude others. It is up to you on how you want to consolidate the loans, but keep in mind you’re working towards paying the bank less and applying more to your principal.
Extra and Additional Payments
When thinking about payments, most institutions think in terms of monthly payments. Why do payments have to be monthly if you get paid every two weeks (assuming this is the case in most situations)? To pay down loans more quickly, why not take your loan and divide it into two and pay half of the payment overtime you get paid. This way you end up paying 26 small payments instead of 12 large ones. Wait, 26/2 = 13. That means you would make a whole “extra” payment per year if you pay every 2 weeks instead of every month. This extra payment over the course of 10 years can save you almost an entire year on payments and a ton on interest. Why not take this one step further and include some rounding. Let’s say your payment is 234.30 per month. Instead of paying 234.30, pay 240 instead for an even payment. You could even round higher and pay 250. It’s up to you, but paying those few extra dollars every payment can also go a long way in paying less interest and paying off your loan more quickly.
Student loans are commonplace in our generation. Unless we are fortunate enough to avoid them altogether, it is a discussion topic at some point in our daily conversations. Let’s work to keep more money out of big banks and more to the principal in order to secure our financial futures. Our parents never had to worry about student loans or be in as much debt as we are, but then again most probably will never make as much money as we will.
- These methods do not just apply to Student Loans, but can be applied to any debt.
- These methods are to be used as a guideline. Each person’s financial situation is different and needs to be treated as such.