Paying off your student loans as a new graduate feels like an eternity away. You’re just starting your career and can’t even start living your life to the fullest because of all the monthly payments. You most likely can’t count on student loan forgiveness because of all the requirements these schemes have.
Still, minimizing the interest on your student loans is possible, so you don’t have to pay too much more than what you borrowed. Here are six steps to paying off your student loans the smart way.
1- Plan A Budget
You can’t afford the luxury of being careless with your finances if you have student loans to pay off. You have to carefully manage all your expenses so you can pay as much as possible each month (we’ll get into why that’s good).
The first step to managing your finances is planning a budget. Estimate how much you spend on food, rent, and other monthly expenses. Also, include all your other monthly payments and subtract this amount from your income. If you stay within budget, the remaining amount should be available to pay for your debts.
2- Pay More Than The Minimum Payment When You Can
Paying only the minimum amount payable each month isn’t a good idea. It may leave more for your monthly expenses, but it won’t help bring your payoff date closer. If you pay more than the minimum payment, you will have paid off your loans sooner, so you can start planning your future.
You should pay more than the minimum amount payable because it lowers your total interest amount. The total interest you pay for a loan increases the longer you spend paying off your student loan.
3- Don’t Even Think About Saving
If you have a student loan on your back, don’t even think about saving. You may be tempted to pay the minimum amount payable each month and use the remaining money to start saving for a car or something. That’s a bad idea. Your interest on your savings account will likely be much lower than the interest you’re piling up on your student loan. Before you’ve completely paid off your debt, don’t start saving for anything.
4- Start An Emergency Fund
You normally don’t include emergency costs in your financial planning—you never know which month you’ll face one. If you’re not saving any amount from your income and some expense comes up, you’ll have to squeeze your monthly budget or get another loan to pay for it.
Start an emergency fund where you set aside a small monthly amount for emergencies. This will ensure that if something breaks down or you need something expensive, it won’t affect your ability to pay off your loans.
5- Cut Costs Where You Can
You probably learned ways to cut costs everywhere as a college student; now, it’s time to put your skills to the test. Maybe you don’t need Disney+, HBO Max, and Hulu subscriptions if you don’t even have time to watch the stuff you like on Netflix. Maybe you don’t need to show off a frame rate of 120 fps on Cyberpunk with your GeForce GTX 3090, and you can do with the much more affordable RTX 3060.
You can also cut your living costs considerably with better choices. If you get a roommate, you cut your rent in half and save on food. The sooner you can pay off your debts, the sooner you can start spending your money the way you want. Why not go all the way?
6- Use The Debt Snowball Method
This is an easy way to pay your debts when you have multiple loans. The method is simple: pay off smaller loans before the bigger ones. If you have multiple loans, pay the minimum amount payable for all the loans except the smallest one. Use all the amount remaining to pay as much of the smallest loan as possible. Soon, you’ll have fewer loans to worry about.
If you have multiple similar loans, use the debt snowball method to pay for the one with the higher interest rate first. The sooner you pay off high-interest loans, the less extra money you’ll end up paying.
About The Author
This post is written by Francisco Jose Faraco, a Teaching Assistant for Financial Mathematics at the University of Chicago. FINRA Brokercheck Francisco Faraco also holds the CFA designation and has worked with multiple international businesses and organizations.
Read also: techpostusa