The Importance of Thinking Long Term

Michael Lux Blog, Student Loans 3 Comments

When it comes to handling student loan issues, the temptation is to just think about this month or the next.  It is hard to blame someone for thinking along these lines.  If you are living paycheck to paycheck or unemployed, just getting through each month is a major hurdle and an accomplishment.  Unfortunately, this approach can get you into trouble with your student loans.

The Penny Pincher

Sometimes, people can think they are doing the responsible thing, but in reality, they are only hurting themselves.

This is probably a controversial point of view, but scrapping every last penny together to make a student loan payment is a mistake.  In fact, it is a recipe for disaster.  If your lender wants $500 a month and you have to give up your Christmas bonus, sell your furniture, and eat ramen noodles for two weeks straight; you are in trouble.

You may think you are doing the honorable thing by paying your bills and doing everything you can, but you are setting standards for yourself that you can’t possibly keep.  What happens when there is no bonus income?  What happens once you pawn off all your belongings of value?

These temporary ways to pay the bill are only delaying the inevitable.  That $500 per month is too much money.  If you put together a budget, you trim all the extra spending, and you simply cannot afford the expected monthly payment; it is time to come up with a plan B.

Start by calling your lender.  Explain that the $500 per month is just to much money.  Look into alternative repayment plans.  If you are paying off federal loans, look into IBR or PAYE.  If you have private loans and your credit is still in decent shape, try to refinance to avoid getting beat up by huge interest rates.  Whatever you do, figure out a plan that you can afford.  Whatever you do, don’t fall for the deferment (we will have more on that in a bit).

People often make the mistake of thinking that making three or four payments will show the lender you are doing your best.  They think that the lender will see they are doing their best, and cut them a break when they finally say they can’t afford the payment.  Wrong.  Making three monthly payments in a row just shows the lender that you can actually afford the payments.

If your lender asks for $500 per month, the question is not how can I pay that this month, the question is, how can I pay it this month, next month, and every month until the loan is paid off.  Until you have a plan that works long term, student debt will continue to haunt you.

The Procrastinator/Recent Grad

Another way that short-sided thinking can bite people is the deferment.  Some people may think that taking a few months of deferment is not a bad thing at all.  Having a few extra bucks to spend or avoiding that first student loan bill can be very tempting.  They may even call their lender and say they can’t afford the payment.  Lenders are often all too willing to offer a deferment or a forbearance.

The thing that lenders realize, but most borrowers fail to realize, is that those deferment months are expensive.  Not only are you pushing back paying off your loans, but your interest is growing.  As the balance of the loan grows, your monthly payments go up.  Putting off paying on your student loans is like putting off going to see the doctor.  It may work out in the long run, but you may not even realize the consequences of the delay until it is too late.

The Bottom Line

Paying off student loans is a marathon and not a sprint.  If you completely exhaust yourself after the first mile, the next 25 will be impossible.  Smart planning requires an honest assessment and forward thinking.  If you find a solution that works long term, you can avoid a terrible monthly stress.