I’ve been helping people with their student loans since 2013. Of the thousands of borrowers I’ve come across, only a handful have been worried about their loans while they still are in school.
To put it bluntly, many people spend their time in school creating student loan problems, and then they spend decades after school trying to dig out.
The sad part is that there are many steps that can be taken during school to make life after graduation much easier.
Student loan planning during school is easy, and it makes a huge difference in repayment.
Try to Knock out the High Interest Private Loans Right Away
The high interest private loans are the worst. Repayment plans have no flexibility, and the daily accumulation of interest makes it an uphill battle.
Borrowers who are still in school have multiple tactics they can used to reduce or completely eliminate high interest debt.
At the end of the semester, any extra student loan funds can be used to pay down the high interest loans. In theory, this money could be split evenly between all of the lenders. In reality, the best move is to use 100% of the extra funds to get rid of the worst loans.
Similarly, use income from the summer to pay down the high interest loans… even if it means borrowing a little extra the following year. Borrowers should look to lower high interest private loan balances even if it means borrowing a little extra from the federal government. Trading private loans for federal loans is a good swap and something that many borrowers in repayment wish they could do.
Ideally, students should be looking to eliminate all student loans, but it is important to recognize that all loans are not created equal and that some are a much bigger threat than others.
Keep Housing Costs Low
Having a nice apartment may sound nice, but spending just a bit extra really adds up in the long run.
Most student loan borrowers will be repaying loans into their 40’s. That means most college students should expect to carry their college debt for about 20 years or more.
If we assume a 6% interest rate, that means for every $100 extra spent on housing, borrowers will have to pay approximately $320 due to the 20 years of interest on the debt.
A year spent in an apartment that is just $100 per month more expensive than necessary will cause nearly $4,000 worth of additional student loan payments.
Housing Costs are not the only issue…
Think of Spending in Terms of Repayment Costs
Using the math from the housing example, the easy way to run the numbers is just to triple everything. Going out to eat instead of eating at the dining hall doesn’t cost $10… it cost $30.
A $1,500 Spring Break trip will cost $4,500 by the time the student debt is paid off.
Borrowing money for decades is crazy expensive. Doing it to pay for an education may make sense for a lot of people. Borrowing extra money to pay for things that are not important is asking for trouble.
The 3x rule is a great way to keep spending in check. If you are not willing to pay triple the up front price, then it probably isn’t worth it.
Student Loan Grace Periods are for Suckers
A student loan “grace period” is great for lenders. They can present the grace period as a way to help borrowers get situated after school before repayment starts.
In reality, the grace period is a great way to run up the debt balance before a borrower starts repayment.
The class of 2018 graduated with an average student loan balance of approximately $30,000. During the six month grace period, this balance will grow by about $1,000 for borrowers with an average rate of 6%. Borrowers with higher interest rate loans or larger balances will see their student debt balloon even more during the grace period.
The takeaway for current students is that they should begin repayment as soon as possible. Not being obligated to make a payment doesn’t mean that a payment can’t be made.
Getting a quick start on repayment is a valuable first step.
Don’t Sleep on Scholarships During School
Time spent applying for scholarships is time very well spent.
Many companies and organizations create scholarships to help people afford college. The key is to cast a wide net and to fill out as many applications as possible. While there are many sites that host scholarship databases, looking around for local scholarships may lead to finding less competitive opportunities and better fits.
Going back to the 3x rule, a $1,000 is really worth $3,000 to the average borrower.
Student loans are incredibly easy to get. Lenders are eager to offer this money to most borrowers because it means collecting interest for many years to come.
Current students don’t need to be experts on repayment plans or forgiveness programs during school, but they do need to recognize the peril that can be caused by student loans.
An awareness of the problems of student debt combined with taking a few simple steps can make a huge different in the long run.