The trouble with student loans is that procrastination is really expensive. Many borrowers fall into the trap of kicking the proverbial can down the road, only to learn that each kick costs money. Whether by deferments, forbearances, or burying their heads in the sand, borrowers who put off paying down student loan balances spend far more in the long run. We often call these borrowers a lender’s dream come true.
When is it time to get serious?
The short answer is right now. If you are out of work or unable to put food on the table, you might have a decent excuse. If you are avoiding repayment because the budget is tight or there are other things you would rather spend your money on, you are making a huge mistake.
Some signs it is time to get serious with your student loans:
- You have a full-time job with a steady income.
- You don’t expect any huge raises in the near future.
- Your lender says you have maxed out deferments or forbearances.
- You have some discretionary income each month, even if it is minimal.
- You investigated student loan forgiveness programs and realize you won’t qualify.
Why the Rush?
Carrying student debt is really expensive. An average borrower has a combined $30,000 balance, if we assume a 7% interest rate, that borrower spends $175 per month on interest alone each month. Many borrowers have larger balances or higher interest rates. Those that pay less than the monthly interest will see their balance go up, even if they don’t miss payments.
Paying interest on student loans offers no real benefit to borrowers — it is simply profit to the lenders. The longer the loan lingers, the more expensive it becomes.
The good news is that each time the principal balance drops, the monthly spending on interest drops. As long as your monthly payment is greater than the monthly interest, each payment will go further than the last. As time goes on, a growing portion of the payment will reduce the principal balance. Eventually, the last payment has almost zero interest, and the debt is gone.
How do I get serious about repayment?
There are a number of different strategies for repayment. We typically suggest a plan of attack that pays the minimum across all loans and focuses all other available funds to attack one specific loan.
The reality of the situation is that repayment isn’t particularly complicated. You don’t need to be a professional accountant to figure it out. It is hard because it is expensive and requires personal sacrifice. Eliminating student debt is difficult because money doesn’t grow on trees, it takes a long time to pay off, and there are millions of things that most people would rather do with their money.
For many, the key to getting serious is to have a change of mindset. Instead of trying to spend as little as possible on student loans, focus on debt elimination. If paying an extra $200 towards student loans is treated as a victory rather than lost money, it will be much easier to pay off the debt.
Paying off student loans will never be easy but it can be done and it must be done. The sooner you get started, the better.