Student debt. Loans. Budgets. These are just some of the stressful topics about which recent college graduates are stressing over. They followed the plan. They worked hard in high school to get into college, then studied and graduated with degrees in their chosen fields. They have diplomas, which should mean salaries, income, and even savings, but with student debt looming, that’s not always the case.
So what’s the best way to deal with student loans?
According to Bennie D. Waller, Chair of Accounting, Economics, Finance and Real Estate as well as Director of the Center for Financial Responsibility at Longwood University, it starts before graduation day. Students need to think about the demands of their chosen careers, and if the cost can really be justified.
Bennie D. Waller
“Students need to first consider taking on too much student loan debt in conjunction with their choice of degrees/career. [They] should resist borrowing if expected salaries of their degree does not substantiate the amount of student loan debt they are considering. For example, many students want to be an actor, but very few ever make it to Hollywood. How can they best decide? Cost/benefit analysis."
However, once graduation day has passed, student debt does become a reality for many people. It is known that budgeting is key when it comes to repaying loans. But before coming up with a feasible budget, it is critical to sit down and make an informed plan.
Award-winning freelance writer Michelle Lerner says that it’s crucial to have all the information regarding your debt before you begin planning.
“The first thing recent grads should do is to make sure they have complete information about their student loan debt: how much they owe, when the payments must begin, what the payments will be and the interest rate. Some borrowers get into trouble because they aren't prepared or have forgotten about some of their loans,” says Lerner.
The proper research in the beginning stages of planning can really reduce stress later in the game, as well as give you a realistic approach to repaying the loans. Be sure you’re aware of the exact amount you owe, as well as the interest rates. Financial planner and publisher of the popular personal finance blog, Money Q&A, Hank Coleman reminds us to keep in mind other debts aside from student loans.
“The first thing graduates need to understand is exactly how much they owe and at what interest rates. Only after you know the amount of your debts, then can you begin to tackle repaying those student loans. With credit cards, car loans, and other debts competing with your student loans, it's imperative that you take a holistic approach to how much you owe by looking at all your debts together."
Once you’ve gathered the information about your total debt, it’s time to look into repayment options.
Scott Bilker, founder of DebtSmart.com and author of books Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart, claims that it’s best to choose a plan with low monthly payments.
“The first thing recent grads need to do to tackle their debt is to look into their repayment options. I would pick the repayment plan with the lowest monthly payments because you can always pay more if you want, however, you can never pay less. Therefore, it makes sense to have the flexibility to pay the lowest amount,” says Bilker.
So you’ve done your research, chosen a repayment plan, and now you’re ready to begin that budget. Consider this wise advice from Rachel Cruze:
“The first step to tackling debt is to make a plan for your money, also known as a budget. Without a budget you don’t know where your money is going or what you’re doing with it. Sit down and figure out your income and expenses, so you know how much money you can put towards your debt each month. But in order to really tackle your student loan debt, find ways to cut back on expenses and create more income by picking up extra jobs.”
Figuring your income into your repayment plan is imperative. Mark Kantrowitz, Senior Vice President and Publisher of Edvisors.com notes the importance of the debt vs. income balance.
“The key is to keep debt in sync with income. Total student loan debt at graduation should be less than your annual starting salary, and ideally a lot less. If total debt is less than annual income, you'll be able to repay your student loans in ten years or less.”
Keep in mind that once you have you job and source of income, it might not be as simple as paying off a bit each month. Certified Financial Planner with the real estate investment firm Valorton Management Inc., Roel Sarmago advises borrowing to invest.
“…learn how to borrow to invest, because chipping away at that debt with just an entry level salary is going to take a really, really long time to pay off. Yes, that's basically saying go into more debt, but in a calculated manner, one in which their investments will not only produce enough positive cash flow that will pay for their investment debt, but also put extra money in their pockets to help pay down their student loan debts faster.”
While paying off your loans may just appear as numbers on paper, it’s important to remember the real-life implications of debt repayment.
“It represents dollars due and a long-term commitment to repay. Student loan debt can be a significant drag on your cash flow and credit,” says personal finance expert and author of The Business Life, Michael Kay. He also advises to create a “balanced approach in building your financial life.”
So what can a recent grad to implement these great pieces of advice? Begin by taking a close look at your lifestyle and what you hope to accomplish. Do you want to get a place on your own? Do you mind living with your parents? What are your job prospects?
If you do have a job, start making a budget. Be sure to consider food, rent, utilities, and other necessary expenses. Look for ways to cut back, and start small. Maybe invest in a coffee machine instead of taking your daily trip to the coffee shop. Or perhaps pack your lunch instead of going out every day. Hold yourself accountable!
Once you’ve come up with a realistic budget, look into your options, and don’t be afraid to ask your parents for advice. Look online for loan repayment programs and find what works best for you and your financial plan. If you can’t make the payments for a standard 10-year repayment plan, look into extending the plan to lower your monthly payments. Just keep in mind that this may jack up your interest.
After you have your plan, make sure you keep in touch and on top of things. If you relocate, don’t forget to inform your lender. They are working with you, not against you, so don’t be afraid to reach out.
Yes, student loans may seem daunting at first. And they are. There’s a lot to keep in mind when it comes to repaying, budgeting, and balancing your income with debt. But with thorough research and the right planning, you can and will find an effective way to repay those loans while still living a balanced and fruitful financial life.