This week’s blog post in our “Financial Planter” series is written by Chris Vasquez, a Financial Services Professional.*
When it comes to student loans, a large percentage of students these days seem to be getting used to the idea of carrying student loan debt after they walk the stage. This year, more than two-thirds of college graduates will be in debt, and the average student loan debt at graduation is approximately $35,000. I am going to assume that the majority of people reading this have already completed college and are attempting to pay down their student loans. Here are 3 items to consider as you make a strategic payment plan.
Step 1: Figure out how many loans you have, what kind of loans they are (subsidized or unsubsidized), what your interest rate is on all loans, and what the projected payoff dates are. These are just some of the questions you need to ask yourself before you come up with your plan on paying your loans off.
To make life a little easier for you during this process, it may make sense for you to consolidate (if possible). I have seen some people having to keep up with several statements, different interest rates, loan amounts, different due dates, government loans and private loans… This can be overwhelming even for a nerd like me to keep up. The first step is to make the call or get online with your lender. They will hopefully walk you through if consolidating can be done for your loans.
I am always surprised when I ask people these basic questions, and they look at me as if I am speaking Chinese. I get answers like, “Umm I don’t know, I have never logged on to see,” or, “I didn’t know I could be charged different interest rates.” My personal favorite response, “I am not sure how much I owe in total… I just know there is a certain amount of money being drafted out of my bank account each month.” The last statement really confuses me…You mean to tell me some institution has a link to withdraw money from your bank account, and you are not sure how much or how long this will go on?
Step 2: Are you able to pay more than the minimum payment? This seems like a pretty basic question, except most people are not willing to give up the lifestyle they have now to pay more on a loan they took out in college. This is one area where you and only you have complete control! The longer you pay only the minimum, the more interest you end up paying during the life of the loan. Now, if you enjoy spending your hard earned money to pay a lender interest, then keep paying the minimum. I don’t believe there are too many people nodding their head in agreement saying to themselves, “Actually Chris, I do enjoy waking up early, fighting traffic, and staying late at work just to pay more interest on my student loans.”
Be realistic when you consider paying more than the minimum on your student loans. If you are currently paying $300 per month as a minimum and you try to increase your payment to $1,000 per month you may end up falling short. If you fall short early in the game, then you may end up giving up and going back to the minimum payment.
This happens all the time when people go on diets or try new workouts. Gyms are always packed at the beginning of the year (New Year’s Resolutions), but come February gyms are not as crowded and it just turns into a nice idea to do, one day in the future. The same thing can happen with increasing your monthly payments if you do not set a realistic goal of what you can afford over the minimum.
Step 3: How do student loans impact my future? I call this the “ripple effect.” When it comes to student loans they can have a big impact on a number of areas in your life after your college days. One area is when it comes to buying a home. Most lenders will want to know what your debt to income ratio is. If you have a small income and a lot of debt it may be a challenge to find a lender willing to offer you a loan. If they do offer a loan, it may come with guidelines that are not favorable to you, such as higher interest rates, private mortgage insurance, or smaller loan amounts. Buying your first home is challenging enough without student loans, so making sure you are aware of your overall loan situation can save you money and spare you the anxiety.
Another area that most people don’t think about is carrying a large student loan into a marriage. I have talked to couples that tell me it causes a strain on the marriage within weeks after saying “I do.” My question is usually, “Did you not know about this before you got married?” Not communicating about loan obligations isn’t the best way to start a lifelong commitment. Carrying debt into a marriage is very common for college age people, but should be discussed thoroughly before tying the knot to avoid problems. Student loan debt does not mean you have to settle for having a financial burden put on your marriage. Having a conversation with your significant other and coming up with a plan on how to handle the debt can save you from disagreements or arguments in the future.
The sooner you come up with a plan for eliminating your debt the better off you will be in the long run. The problem is most people feel overwhelmed with the idea of coming up with a plan to pay off their student loans. My suggestion is to start small. If you can have someone hold you accountable, it can really work wonders. The key is to just take the first step!
*All content provided in this blog is supplied by Chris Vasquez is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information in or found by following any link within this blog.
Chris Vasquez, is a Financial Services Professional with Lucien, Stirling & Gray Advisory Group, Inc. in Austin, Texas and is passionate about helping people achieve the life they want. Chris emphasizes that daily behavior with your finances is more important than knowing every detail about financial planning.