College debt can start to loom from the day your six-month grace period is up, and hang over your head for years to come. Here’s a quick guide to what to do about your debt, whether you’ve just graduated or have just decided to eradicate those loans.
The cost of college education has risen by 130 percent in the past 20 years, and graduates are under a lot of pressure to start paying off their loans. But it can be difficult. America has around $1 trillion in educational debt—that is a lot of money to pay back.
These debts can weigh down new graduates, holding them back from new financial opportunities until their debt is cleared.
However, paying off debt doesn’t have to be difficult or stressful. Here are five smart methods that you can use to pay off your college debt quickly.
Choose the right repayment plan
Eighty-five percent of education debt is divided among Perkins, PLUS, Stafford, and Direction Consolidation loans, and there are five different repayment plans you can choose from. One only requires a payment of $50 a month for up to 10 years, while others take a “reasonable percentage” of your wage and then cancel the remaining debt after 25.
It is important to think about your needs and finances when you decide which repayment plan is best for you. Smaller monthly payments mean that you will be paying more in the long run, as the interest will be higher. As a rough guide, aim to use around 10 percent of your paycheck to pay back your educational debts.
Sign up for auto-deductions
Automatic online payments make paying back debt much easier, as you don’t have to actively think about paying back debt—it just happens. Set up monthly automatic repayments to make sure you never miss a payment, and you will get added benefits: Lots of money lenders charge lower interest rates for the people who set up automatic payments, helping you to spend less.
Pay off high-interest/private loans first
It’s true that some debt is worse than other debt. Fifteen percent of all U.S. education debt comes in the form of private loans, and the high interest on them means you end up spending much more money. This means it will take you longer to pay off your debt, so focus on paying off high-interest private loans first.
The high interest isn’t set in stone, either; as the economy improves, the interest will get even higher on private loans. If you want to get out of your high-interest debt quickly, pay double the required amount each month to speed the process up, and pay the minimum on the less expensive loans.
Create a five-year plan
Some people spend over 20 years paying back their college debt, but it doesn’t have to be this way. You can create a five-year plan to pay back all of your college debt, and although it may seem expensive, having a finish date can really help to motivate you.
Creating a five-year plan also means you know exactly how much you need to pay back each month, so you can always budget accordingly. Making the payment will quickly become a normal monthly routine, like paying rent or a mortgage. It also means that you will get used to budgeting and being financially independent—and when you finally pay off all of your college debt, it will feel like you have just received a pay raise!
Doing this is another good way to lower interest rates significantly. Think of it this way—the interest for a five-year debt is much cheaper than the interest for a 15-year debt.
Avoid the most common traps graduates fall into
Graduates are often experiencing financial independence for the first time, and they often fall into common money traps, such as spending recklessly for instant gratification. Often people forget about their long-term goals, and instead live in the present, spending their money on expensive gadgets and clothes. Avoid these traps by planning ahead and making sacrifices for the future. It is difficult initially to be financially disciplined, but after a few months it will just be a habit!
Disclaimer: Hey! Welcome to our disclaimer. Here’s what you need to know to safely consume this blog post: Any outbound links in this post will take you away from Simple.com, to external sites in the wilds of the internet; neither Simple nor our partner banks, The Bancorp Bank and BBVA Compass, endorse any linked-to websites; and we didn’t pay/barter with/bribe anyone to appear in this post. And as much as we wish we could control the cost of things, any prices in this article are just estimates. Actual prices are up to retailers, manufacturers, and other people who’ve been granted magical powers over digits and dollar signs.