The Scottish satirist Thomas Carlyle said that “There are but two ways of paying debt: increase of industry in raising income, increase of thrift in laying out.”
In January many people who finished studying in 2017 will start paying back their student loans, because it’s this month that the federal government deferral period ends. If you are among those “lucky” souls, or know someone who is, this article will help you lower your debt as fast as possible while still making ends meet.
Your budget
A personal or home Budget is the foundation for good personal financial habits and a
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Learning to make your budget and renewing it each year
is key to smart financial planing for life. Image: William Iven.
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person’s future financial plans. If you aren’t too sure of what your expenses are, if you want to learn if you’re spending too much on some things, or if you just want to get organized, I can help. In the article Personal Budgeting: Getting Started I explain how making your personal budget helps you, and what you will need to make it . And in Personal Budgeting: Making Your Personal Budget you'll find the full explanation on how to do it, with an Excel worksheet that I provide, and how to interpret your results.
If, after examining your budget you decide that you have a little bit of money to spare to use on lowering your debt, let’s examine your options. Most student loans have a repayment period of 10 years, but if you pay more ahead of time you will shorten that period and save a lot on interest.
The rates
First, look at your loan rates (this is a rule that will apply to all your debts in life, by the way) one by one. A higher rate means more interest paid over time, and the high rate ones are the ones you will want to start paying down first, or consolidating (more on consolidating later).
Each loan has a different rate and, in general, the U.S. government will set you up with a
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Every dollar you pay early to your student loans is
an investment for your future finances. Image: Neonbrand.
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monthly automatic payment of the lowest amount that they know you can afford. They’re very flexible this way, and so are most private lenders. The reason for the low payments is that the longer you take to pay them, the more interest you will pay. This is, after all, a business.
The thing is, if you know that most months you can pay extra but you are not sure that it will be that way every month, you can’t be calling to increase your minimum payments; plus, calling them means long holds, and some private lenders won’t even let you change your minimum payment amount.
How to pay extra to your student loan to your best advantage
Here's the fix. The day after your higher-rated student loan payment is deducted from your account (or if you make the payment yourself via Click-Pay or your electronic bill payer service) you can go to the lender’s website (or Click-Pay) and make another payment for the amount of your choice.
The reason you need to wait for the established payment to go out is simple. Loans work with compound interest -if you don’t know what this is, in this article you can find out- and, once they receive your regular payment, they will first pay off any due and accrued interest, and the rest will go to pay down the principal. The day after that, interest will start accruing again over that new lower principal balance; so, the sooner you pay that extra bit, the better.
Your next due date
If you are making the payment directly on your lender’s webpage, keep an eye on the next due date, that it doesn’t skip next month and jump to the next. If you see that it wants to skip
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| You're not alone in this. Image: Rawpixel. |
your next month’s dues because of this extra payment, change the due date manually to stay for next month. If you can’t make that change, call the lender and make the payment over the phone and request that the next due date remain next month. Keep in mind that if you have several loans with that lender you will have to specify which loan you’re paying, or they are likely to divide the loan payment among all your loans with them.
If you can’t make the loan payment on the lender’s webpage and you are using Click-Pay, you need to make sure that the loan date doesn’t get advanced. In this case your best choice is to make a payment that is less than your minimum payment amount. But, if you want to make a larger payment because you have quite a bit extra, don’t hesitate: call them on the phone to pay, and specify your payment and next due date.
Next month
Just in case, it’s good to confirm via next month’s statement that your extra payment was handled correctly. If there was a mistake call them to alter how it was processed -they have to do it according to your instructions, by law- and ask how to do this in the future so that any extra payments are handled the way you want.
Other options to improve on what you owe
Do you have private student loans from your education in the U.S.? If so, and you’re a US
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You'll always remember that feeling when you paid off
your student debt. Image: Austin Schmid.
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citizen/resident and member of OAS FCU, keep in mind that the credit union provides student loans that can help you consolidate those debts and lower your rates. These loans don’t have application fees or prepayment penalties.
And if you live abroad or aren’t a resident, OAS FCU can also help with a loan of up to $15,000 to help pay post-secondary studies in the U.S. or to consolidate some of those debts. To find out more contact their loan department or visit this webpage.
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