Student loans are a problem for many young people who are just starting their lives. When fresh out of college, not everyone will have a high-paying job that will help them deal with the heavy loans they took to get there in the first place. It’s very important to deal with these loans as soon as possible to make sure they don’t accrue interest and become even more difficult to pay off. If student loans don’t get paid, they can even default, which can lead to big problems. To avoid defaulting and to ensure you manage to get ahead of your student loans before they become a problem, take a few steps to make sure your finances are in order.
Make a Budget
The first thing you should always do when trying to become financially savvy is to make a budget of your incoming vs outgoing expenses. While tracking your income, the first thing you should subtract is your student loan payments or other debt. Anything left over after subtracting other expenses should be divided into savings, an emergency fund, and a fund for personal luxuries. Learn about zero-sum budgeting and 50/30/20 budgeting to help prioritize and organize your expenses. While personal purchases are important, they are of least priority compared to paying off your loans and other expenses. If you do this right, you’ll know exactly how much money you have for every situation, which will really help you out.
Pay Attention to Capitalized Interest
Certain student loans can accrue interest even while you’re still in school, or during the grace period you’re granted before you need to start paying the loans off. This interest will grow and make you end up having to pay more debt back than you had initially expected. It’s important to understand if your loan has or will have any capitalized interest, and if so you should work to pay it off as soon as possible.
Make Extra Payments
Because of the way loans work, the longer you take to pay them off, the more you’ll end up paying. This is why it’s important to pay more than the minimum during each payment period. Find out how much you need to spend to make a minimum payment, then add a percentage to it that you can afford based on your budget. If you consistently do this you’ll ensure your debt gets paid off long before you had initially expected to, which means you’ll be paying much less debt back overall.
Get a Side Job
These days it’s not too difficult for anyone to get a side job like driving for Uber or Lyft, walking dogs, teaching a musical instrument, or many other things. There are many apps that can give people quick temp jobs that let them earn extra cash. You should take advantage of these opportunities until your loans are paid off. Earning extra money will help you pay more than your minimum payments, which means you’ll be spending less over time. If you’re able to pay more than your minimums without doing this, it still might help to get some quick gig-based jobs to earn extra money for yourself while you’re paying off your loans.
Use Any Extra Money for Your Loans
Any extra cash you receive for just about any reason should be applied to your student loans. Paying off your loans should be one of your highest priorities. The type of money in question could be a bonus from a raise, a tax refund, a gift from a relative, inheritance money, or really just any money you receive from any reason that isn’t factored into your normal monthly budget. Don’t put money like that into a gift for yourself, because paying off your loans is almost certainly a much better gift.
Refinance if You Can
If you qualify, refinancing your student loans can save you thousands of dollars and could potentially shave years off the time you’ll need to finish paying them off. What this entails is replacing your student loans with a single private loan that hopefully has a much lower interest rate. This lower interest rate can sometimes be half as high as the loans you were previously paying. In order to do this you should research different lenders rates to figure out a plan that might work for you.
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Avoid Defaulting At All Costs
One of the most important things you need to do is avoid defaulting, because this could cause a lot of problems for you. A student loan defaults if you haven’t made a payment in a certain time period which depends on the institution from which you received the loan. After a loan has defaulted, you could suffer additional charges, a damaged credit score, monetary penalties, garnished wages, and more. If you're in danger of being unable to pay your debts, explore debt relief options to try to make your financial situation more tenable.
Even if your loan defaults, however, there are options. One is to pay back the full amount immediately, which is likely not possible. Another option is loan rehabilitation, which creates a new payment plan on a strict time schedule. Successful loan rehabilitation will remove the default from your credit score, which will help you out in the long term. If rehabilitation isn’t possible, a third option is consolidation, which will give you a longer period to pay off the loan, but more to pay in the end due to interest. It’s not a perfect option, but it can help you out if you default.