How to Avoid Drowning in Student Loan Debt
Information Courtesy of USAA
- Only borrow what you need
- Consider future earnings
- Get a federal student loan
- Take advantage of debt forgiveness programs
- Understand the terms of the loan
- Consider consolidating payments and pay on time
As college costs rise, many students find themselves taking out bigger and bigger loans to pay for their education. Carefully considered and managed, student loans can be a smart investment in your future. Here are nine strategies to help you manage student debt:
- Borrow no more than you need.Student loans should pay for educational expenses only: tuition, books, required fees and, if necessary, room and board. Consider a part-time job if you need spending money.
- Keep your career earnings in mind.Borrow an amount in line with your future career. It makes no sense to graduate with $100,000 in debt if your job will only pay $40,000 a year. Your total monthly debt payment (including education loans, car, home, etc.) should be less than 36% of your monthly pretax income.
- Consider a federal student loan. They typically offer competitive interest rates, flexibility and unique income-driven repayment and loan forgiveness programs.
- Consider a private student loan. If there is a gap in paying tuition and other school expenses from other sources (federal loans, grants, scholarships, etc.), private student loans can help.
- Understand your loan terms. Know the interest rate, the monthly payment and the repayment start date. Also, notify your lender if you graduate early, drop out or transfer to a different school.
See how student loan payments fit into your spending plan and make necessary adjustments.
- Make student loan payments on time.Ignoring your student debt can ruin your credit score, making it more difficult (and expensive) to get a mortgage or car loan. Some companies even check a potential employee's credit history when hiring.
- Take advantage of available programs.The federal Pay As You Earn (PAYE) Repayment Plan limits monthly payments to 10% of your discretionary income, a calculation based on your income in comparison to federal poverty guidelines. Those in public service, including the military, also can have their balance forgiven if they've made regular loan payments for 10 years. If you're in the private sector, you can get balance forgiveness after 20 years. Note that the IRS treats the amount forgiven as taxable income, so you may be hit with a big tax bill.
- Use military status to lower your interest rate. The Servicemembers Civil Relief Act (SCRA)caps the student loan interest rate of active service members at 6% if they incurred the debt before entering active duty.
- Consider consolidating. Combining several loans into one can save money and streamline your bills. Be sure to ask loan providers about plans and possible fees. If you're struggling, your loan provider may be able to reduce your monthly payments or defer payments until you get back on your feet. But these steps can extend the life of the loan and you end up paying more in interest.
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