The Fastest Way to Pay Off Student Loans

Pay off car or student loan

Students learned an important lesson earlier this month when the interest rate on their student loans doubled on July 1 st - from 3.4% to a whopping 6.8%.

What’s that lesson? We can’t wait for anyone to do us any favours. We have to get used to doing as much as we can for ourselves.

It’s not that your political parties don’t want to help you. Both the Democrats and the Republicans wanted to avoid the hike on the student loan interest rate. But it’s the way they went about it that betrays their insincerity.

Democrats wanted to increase taxes to extend the 3.4% interest rate for another year, while Republicans wanted to link the student loan interest rate to the market. Both plans were unwelcomed, as higher taxes are always unpopular, and linking rates to the markets would subject students to the same abrupt interest rate changes that have been plaguing bonds and mortgages as of late.

So, students and recent grads, it’s time for a plan of your own with three main considerations: borrowing options, expenses and income.

First up, when shopping for a student loan provider, look past the interest rate at their entire package.

Pauline Abernathy, vice president of the Institute for College Access and Success, a D.C.-based nonpartisan, non-profit organization that focuses on college affordability, points out to the Washington Times that “though the federal interest rate increased, federal loans have more protections if students become at risk for default”.

“9lsquo;With higher federal student loan rates, students might turn to private loans thinking they are more affordable, when in reality they aren’t,9rsquo; she said, warning that those who take out private loans are at greater risk of losing a car or a house if they default.”

Besides defaulting penalties, interest rate adjustment schedules should also be carefully considered. They may start you off with low rates early on, but quickly raise them over time. Are rates tied to anything, such as prevailing prime rates? Understand too that interest rates in general are about to enter a period of steady increases which could last for a good 5 years or more. Will your student loan’s rate rise with them? Or can you lock them in now at these lower rates?

Some loans will offer lower monthly payments early on, since you will generally earn less in your first few working years, with payments increasing over time as you gain promotions and earn more. But what if promotions don’t come as quickly as you might have hoped?

The smaller the payment is early on, the more you end up paying over the life of your loan as interest keeps adding up, costing you interest on the interest as it snowballs larger. As with any loan, the more you pay early, the less you pay overall.

If you end up taking multiple loans, as many students need to, pay down the highest interest rates first. Naturally, you have to make the minimum payments on all your loans, so as not to damage your credit rating. But any extra payments should be concentrated on the most expensive loans first.

As you build up a good credit record of timely payments, look around for a consolidation loan at a better rate. At least once a year you should check if you qualify for better rates, knowing that just a 1% reduction in your interest rate from, say 6% to 5%, will over 10 years save you some $161 in interest for every $1,000 borrowed, averaging a savings of 1.61% per year for the compounding.

One more important point on borrowing… if you work out a monthly budget first, you will have a better idea of how much money you really need to borrow. Doing so will avoiding over-borrowing, which makes for a shorter road to being debt-free.

Working out a reasonable budget is tantamount to paying off a student loan. You’d be surprised at how much wasteful spending one can actually do without. Including:

• Get a bus pass. There’s a few hundred dollars a month to be saved by taking the bus instead of owning a car. Sure, it takes a little longer to get where you want to go. But you’d have a chance to read or just relax and take a breather during your busy day.

• Cook for yourself instead of eating out. Not only do you save a ton of money, but you will generally eat healthier, and maybe even eat less.

• If your clothes still fit, keep wearing them. Do you really need a new pair of shoes every 6 months? No one knows how old your clothes are but you. And there’s nothing difficult about learning how to sew. A $10 sewing kit can save you hundreds of dollars a year.

• When you do go shopping, there’s nothing wrong with the discount stores. Only you know how much you paid for your clothes. You’d be surprised how many things actually look good on you, regardless of how little you paid for them.

• And you can look just as good grooming yourself at home as at a salon. Remember that it isn’t so much that looking good makes you smile. It’s smiling that makes you look good.

• After graduation, live with family for a while if possible. The more you can pay-down your loans from the beginning, the more you save in interest. But don’t take family assistance for granted; help out around the house to show your appreciation.

• Always pay more than the minimum monthly payment. Paying just $1 extra each month for every $1,000 borrowed would over 10 years (120 months) save you some $226 for every $1,000 borrowed. Each $1 extra monthly payment would carry an effective value of $1.88 over 10 years, almost doubling in value through the interest saved.

Note too that cutting $100 from your expenses is better than earning an extra $100 at work, as you’d be saving yourself at least 5 to 10 hours of work-time which you can put toward your studies or devote to some regenerative down-time.

But if you can go out and earn that extra $100 here and there, all the better. While the hourly pay of a part-time job is everyone’s first consideration, time should be another, including travel time, in order to leave enough for your studies and rest.

Ideally, the best part-time work would be something related to one’s field of study. Creating a profile for yourself online and then forwarding links to firms or businesses related to your field offers at least two great benefits:

• Since the job would be related to your field of study, you’d gain hands-on work experience and knowledge that would help you advance through your studies more easily and enhance your academic performance.

• You would build relationships with professionals, firms and businesses in your future field of employment, which, whether you end up working for them or not, will give you excellent references and work experience that will undoubtedly help you procure employment after you graduate.

But what about your quality of life? All these sacrifices while going to school can be pretty wearisome. Just remember you are making those sacrifices in favour of your quality of life later on. It’s better to rough it sooner for shorter than to rough it later for longer.

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Help a Reader: Student Loans or Savings?

by J. Money - Published May 5, 2011

A popular conundrum I get asked a lot (like, every single week) is where to start when you’ve got two major problems going on at the same time. Usually, major debt & major lack of savings. I never know what the right answer to these actually are – in fact, I don’t think there IS one? – but I do know it’s always more helpful to hear from a bunch of people over one blogger with a crazy mohawk. So today, I need your help 🙂 What would you write back if you got this email?

Here’s the situation:

I’m 24 and about to graduate with my Masters, which I went right in to after my undergrad. I went to a fancy private college for my undergrad, then moved back to home to go to a state school for grad school (wish I’d been smarter about the tuition the first time around!). I’ve got a job lined up after graduation which will let me stay living with my parents–the pay is good, the benefits are fine, and I’m hoping to use the money I save instead of living on my own to pay down some student debt.

But here’s the thing: two degrees later, my loans add up to almost $100K. It didn’t seem like a big deal when I was 18 and signing the paperwork, but everything added up and now I can’t even process the amount that I owe. One has a rate as high as 10% (gah!) while a few others are variable, so I’d love to start paying down while interest rates are low.

Part of me wants to make a strict live-off-Ramen budget and pay off as much as humanly possible right now. The other part of me realizes I also need to put money into a retirement account before other expenses (wedding, house, kids) come down the line in the future. The another part of me realizes that even if I put my whole salary into my loans, I’d still have 5 figures of debt!

So my plea for help has two parts:

1. What do I do first? Should I look into consolidating? How much of my income should I pile into my loans versus how much should I start saving for a rainy day?

2. How do I get myself into the right mental zone for this? I know I’m not expected to pay off my loans my first five years out, but I also know I don’t want to take advantage of the 30 year repayment plan they give me. How do I call myself down enough to find a pace somewhere between the tortoise and the hare?

Woah! Yes, a game plan is def. needed to make ya feel better 🙂 Although I’m quite impressed with both your degrees – congrats! That is nothing short of awesome. I’d take those over $100k or even $200k of debt any day, as you will forever have an edge over most others out there in the field. Which you’ll also be rewarded handsomely for!

As far as WHAT to do now, however, that’s a bit trickier. It’s always hard to help someone without knowing ’em, esp since I usually go with the emotional side to things over the financially smart method. For example, I’d personally rather have a lot of money in my savings account first before even thinking of paying off debt. Mainly because it makes me feel safer, but also because you then always have the option of USING that money to pay off your debt any day you please. If you go the other route and start knocking it out asap (which is financially smarter), it’s not like you can then “get it back” at any time, ya know? But again, that’s just me.

The best answer here, and probably the most boring, is to work on all things at the same time. Start paying off a little debt while also saving up and living your life as stress-free as possible. That latter part being the most important here (although easier said than done). Yes it sucks being in thousands of dollars of debt, but we also can’t let it ruin our day to day lives. So I think it’s first worth figuring out how much money you think you’d need in savings to feel comfy right now, and then at the same time how much you can put toward paying off your loans every month while still living normally. Unfortunately there’s no magical %’s here that fits everyone. (Which sucks, I know)

What would you all do, friends? How do you find a way to be OK with this?

Bonus tip: Find a good "balance transfer" offer to help pay off debt faster!

If you’ve been making payment after payment (on time) and still haven't been able to get your debt under control, snatching up a good balance transfer credit card offer may be the ticket to try. That’s where in order to gain your business - credit card companies will let you transfer your existing debt to a new card and let you pay ZERO PERCENT interest on it. Saving you tons every month!

What's the catch? Usually balance transfer cards charge a fee (around 3% of your debt balance) to let you transfer your balance to their 0% interest offer. But we've found a great credit card that will let you do a balance transfer absolutely free. Click here to learn more and see if you qualify!

PS: If you don't trust yourself with another credit card, ignore this! This strategy is to help you get out of debt quicker, not risk adding more to it.

How Paying Off Student Loans Can Lower Your Credit Score

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To Pay Off Credit Cards or Student Loans First?

Pay off car or student loanAlmost everyone in the US is in debt.

The most common kinds of debt in the country currently are credit card debt and student loans.

This scenario begs the question – does one pay off their student loan or credit card debt?

It’s a catch-22 like situation, and to find an answer to this, understanding a few basics are in order.

First things first, both credit card debt and student loan are debts which means that sooner or later both these financial obligations have to be met and the debts need to be cleared.

We will discuss a few parameters here to help you prioritize between these two debts.

A loan taken to pay for a student’s post-secondary education and other associated expenses such as tuition fees, books and living expenses etc. is known as a student loan.

What type of debt is a student loan?

A student loan is said to be a good debt. An investment that grows in value and generates long-term income is known as a good debt. A student loan is an investment in the student’s career which grows in value as the student gains knowledge. And the long term income looks promising through the stable and well-paying job that the student is likely to get.

As much as the student loan being a good debt seems positive, the flip side is that there is no such thing as a guaranteed return on this investment. One takes a student loan believing that in a few years the loan would be paid of through a great degree and the consequent high paying job. The lack of assurance that there would be a great job at the end is something worth considering, though.

What are credit card debts?

The unsecured consumer debt that gets accumulated as and when someone buys goods or services through a credit card is called a credit card debt.

What type of debts are credit card debts?

Credit card debts are debts that do not generate income or add to your value, therefore they are referred to as Bad Debts. The interest rates on credit cards are sky- high and the payment or non-payment of these debts have a direct bearing on your credit score. Though credit card debts do not involve an investment which gives returns, it is an essential part of survival, getting accumulated through day to day transactions.

How does one compare student loan debt vs credit card debt?

While student loans give the much needed backbone to students to stand educated and independent, credit card debts help them go about their daily lives.

The principal amount of Student loans is huge whereas for credit card debts the interest piles up in no time.

Here is a compilation of average amount of student loan and average revolving credit card loan in five states of the United States of America. The following table will give you a fair idea of how the burden of student loan differs from that of a credit card debt.

As you can see in the above table, the amount of student loan is huge. The good part is that the interest percentage on most student loans is less than 10%. The loan cannot be written off on the declaration of bankruptcy which means that you are liable to pay it off through your lifetime. Although Student loans can be reduced or forgiven. Another Advantage of a student loan is that you do not need a credit score to avail one.

Though on the face of it, the credit card loan seems to be manageable, the interest rates are very high and the loan keeps piling up into staggering amounts. This is a loan that can be written off on the declaration of bankruptcy. The payments made against credit card bills and loans have a direct correlation with your credit score. Regular payments made before the due date raise your credit score.

Personal debts are debts taken by individuals for consumption rather than investment. It also means that the loan is personal in not being for business. Personal loans are the ones which can be availed to meet any of your personal needs, it need not be specifically for a particular need. The rates of interest are usually higher than that of a car loan or a mortgage.

The reason is that personal loans, more often than not, are unsecured loans that means there is no collateral security offered by you for the loan. In case of a car loan the car is the collateral, in case of mortgage the house can be repossessed in case of a default. So, to secure their payments, the lenders charge a high rate of interest on personal loans.

How does one compare credit card debt vs personal loan?

Credit card and personal loan, both are means of borrowing money in times of need. The major difference between both is the suitability according to the time frame required to pay off your debt.

Credit card loans are extremely high on interest but the best part is that they are available at no interest or 0% interest for the first 30 days. That makes them the best choice to consider if you are reasonably sure of paying off the whole amount due within 30 days.

The worst way to use a credit card is to keep paying only the minimum due amount and let the insurmountable interest pile up.

Personal loans on the other hand, have lesser interest rates than credit card loans, but there is no cushion of an interest free period of 30 days. Personal loans are a better choice for medium to long term borrowings. For instance, if you are looking at a 2 to 5-year duration for paying off your loan, personal loans make sense.Whereas a credit card loan is much better if our pay-back period is 6 months or less.

Both credit card loans and personal loans have similar processing fee and pre-closure charges.

What is the impact that credit card debts have had on college students?

There are a lot of college student credit card debt stories that have gone the wrong way. What should have been a means to a bright and prosperous future has often lead to a lifetime of debt. So what is the way out? What are the alternates that a student can explore? Let us try and answer these questions for you.

What are the types of student loan help available in The United States of America?

There are mainly two types of student loans available:

  1. Federal student loans – loans funded by the federal government are called federal student loans.
  1. Private student loans – loans through lenders like banks, credit unions, state agencies or schools are called private student loans.

How do federal loans differ from private loans?

Here is a quick comparison between the federal student loans and private student loans:

On the whole, Federal loans are more student friendly as the government’s motive is to promote education. The government encourages students through different avenues to take responsibility of their education without intimidating them.

The ideal way to go about it is to try to get federal loans to the maximum extent possible and then explore private student loan options. Private student loans may require a co-signer to assure the repayment of loan in case the student defaults.

What are the financial assistance programs made available in the form of federal student loans?

The different types of federal student loans are:

These are also popularly known as Stafford loans or direct Stafford loans. Direct subsidized loans are most suited for undergraduate students with financial need. The amount that can be borrowed is decided by the student’s school and does not exceed the student’s financial need. The most unique feature of this type of loan is that the U.S Department of Education pays the interest on direct subsidized loan:

Pay off car or student loanWhile the student is in school for at least half-time

  1. During the grace period of 6 months after the student leaves school.
  2. During the loan deferment period.
  3. Direct Unsubsidized loans

These are loans which are made available to both graduate and undergraduate students. For Direct unsubsidized loans there is no need to prove a student’s financial need. Depending on the student’s cost of attendance and other financial aids, the amount of loan is determined by the school.

The interest on loan is payable by the student at all periods. If the student is unable to pay while in school or during grace period or forbearance, the interest gets added to the principal amount of the loan.

  1. Direct Plus loans – for graduate students or professional students or parents

Direct Plus loans are federal student loans where the lender is the U.S Department of Education. To be eligible for this loan, one must be a graduate or a professional student or a parent of a dependent undergraduate student. Apart from this they are required to not have an adverse credit record. The amount of loan is determined by the school based on the cost of attendance and other financial aids.

Federal Perkins Loan is a federal student loan made available to undergraduate, graduate or professional students with exceptional financial need. This is a loan where the lender is the school. The rate of interest is 5%. Only some schools participate in the Federal Perkins loan program. The amount of loan depends on the financial need of the student and the funds available with the school.

Apart from these, the federal government provides the student an option of consolidating all the federal loans availed, for free.

What are the different sources of Student loans?

If we have to make a chronological, exhaustive list of the different sources of finance for a student to fund his or her studies plus living, it would be as follows:

  • Federal student loans- As much as possible.
  • Private Student loans- to make up for the deficit, after considering all the federal loans. These are naturally not the first and most preferred option for the reasons discussed above.
  • Credit cards – For the day to day living expenses. The credit card bills should be ideally paid off with the monthly savings or part time earnings if any. This is advisable because monthly miscellaneous expenses should not amount to much and the aim should be to pay it off in the interest free period of 30 days. Strictly speaking, the credit cards should not be used to borrow for big and long term expenses
  • Personal Loans – These should be explored as a last resort for the long term expenses which could not be covered through the student loans.

Whether to pay off credit cards or student loans first?

Considering all the information provided above, the best conclusion to draw would be that it is best to be current on both credit card debts and student loans. Paying off a single debt and completely overlooking the other is not going to help in any way. That would just lead to one of the debts piling up. Both credit card debt and student loan are quite intimidating, with either the principal or the interest increasing the burden substantially.

If the outstanding amount on credit cards is more, it makes good financial sense to make as much extra payment towards it as possible. Subsequent minimum due amounts payable towards student loans would ensure less financial burden in future. Instead of choosing between both mandatory financial obligations, it is best to strike a balance between them through disciplined management of finance.