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Pay Down Your Student Debt in 5 Easy Steps

Aug 31, 2011

Unless a person was able to qualify for scholarships, he or she probably incurred student loan debt in order to attend college. The Education Insider has compiled a 5-step guide that could help students pay down that balance more efficiently. Read on for more information.

By Erin Tigro

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Step One: Realize Student Debt Elimination is Achievable

Like any problem, the best way to begin to work on eliminating debt is to examine the issue and propose a viable solution. Before you become overwhelmed with how much money you have to pay back, remember this: the debt you incurred was taken on for a reason. It was not mindless spending. You took out loans to excel professionally and to chart the course of your future. It may take some time, but if you work toward paying your debts, eventually you'll be clear of them.

Step Two: Educate Yourself

When it comes to student loan debt, here is one of the most important points to remember: it can follow you until the end of time. Even though many loan holders offer deferments or forbearances, encouraging you to forget that the bill has come due, your debt will eventually catch up to you. And when it does, the interest you will have most likely accumulated by pushing back your obligations will come back with a smothering vengeance. To give you a clear idea of what this means, student loan debt is typically not released in bankruptcy, should you ever need to take that route. Furthermore, if you decide not to pay your monthly minimums, banks can sue you for the money, and the government could be able to seize your tax refund or a portion of your pay to recover their cash.

Step Three: Get Organized

The best way to stay focused on closing the gap between you and financial freedom is to know what you owe. Pull out your student loan bills. Examine your interest rates and take note of which ones are fixed versus variable. Devise a spreadsheet with all of your loan-specific data, including monthly due dates, required payments, balances and fees. Updating the information on a monthly basis can help you stay knowledgeable about your fiscal obligations. Having a visual reminder also makes the debt more real and less easy to shirk.

Also, if you haven't already done this, analyze your monthly income versus expenses. How much money do you have left over each month? See if you can cut the wants out of your budget so that you can apply the difference to your outstanding loan(s). This could mean reducing the number of times you eat out, attend happy hour, shop, get your hair done or go on vacation. Figure out how long it would take you to pay back your loan by visiting online student loan calculators.

Step Four: Consider Your Options

If you're having trouble making your payments, there are alternatives you can research and pursue. Instead of requesting a forbearance or deferment, which could cause you to accumulate interest on top of interest, consider contacting student loan creditors to discuss other options.

Income-Based Repayment

You might be able to work out a payment plan based on your current salary, state of residency and family size. You may be given a longer term or higher interest rate, but the new terms could be more beneficial than a default or deferment.

What's more, under a government-based income repayment plan, your debt may be:

  • Forgiven if you've been making timely payments and work in the public sector for ten years
  • Dischargeable after 25 years of payment

Loan Consolidation

Depending on your original loan rates, consolidating student debt could lower your interest percentages, although private and federal loans can't generally be combined in the process. For private loan consolidation, your credit score will likely affect a potential new rate. If your score has gone up since your initial loan origination dates, you may find this option useful.

In addition, as of 2011, the U.S. government offered a fixed rate on loan consolidations, partially calculated based on the interest rates of all of the individual's federal loans; however, the rate cannot be higher than 8.25%. This option may also be beneficial if you're having trouble making your payments and want the convenience of just paying one collector. If you're interested in a government-based consolidation, the online Federal Direct Consolidation Loans Information Center can provide you with personalized estimates.

Step Five: Decide on a Plan of Action

Now that you've got all the details of your debt laid out, devise your own step-by-step guide. Be sure to make all of your minimum payments. If you opt to keep your loans separate, consider paying down the debt that incurs the most interest first. If you have extra money each month, decide on a figure that makes you comfortable and tack that above the minimum for the loan with the highest rate. Consider sending in extra lump sum payments whenever you find yourself the recipient of unexpected cash, such as an income tax return, a bonus at work or that birthday check from the parents.

Once you pay off one loan entirely, continue living like you still have that payment due each month. Keep making the minimum payments on all remaining loans. Now take the total amount you were paying toward the loan you just completed and apply it toward the loan with the next highest interest rate. Continue this industry-coined 'snowball effect method' until all of your student debts are erased.

Continue reading for information regarding private student loans.


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