Outsmarting your student loans

Woohooo you graduated! Things are great! You have that coveted degree (or two) and you never have to take an exam again! Yeah!

Just one thing though…you still have to pay for that degree. For new graduates (regardless of your field) this can be daunting. When I first calculated my loan repayment amounts I had to pour myself a stiff drink for the shock…yikes. The number was pretty high- almost as much as my rent! That is with scholarships, working multiple jobs, eating lots of beans and living a very slenderized lifestyle! It’s not easy being edumacated, that’s for sure.

Luckily, things aren’t as bad as they seemed. First of all, there are a number of repayment plans that are a little more forgiving than the evenly-spaced-repayment-over-ten-years plan. These alternative plans have encouraging titles, such as “Pay as You Earn,” and “Income Based Repayment,” and they will make paying back your loans a lot more tolerable (at least at first, while you are still working internships while waiting tables on the side). By signing up for one (the paperwork takes a few months, so be prepared) I expect to reduce my required payments by about 75% each month. Some service jobs (government work, teaching etc. etc.) allow forgiveness of the remainder of your loans after 10 years of steady payments (but don’t bet on this! It is still better to pay loans off more aggressively than to assume you will have them forgiven 10 years from now).

Now, that doesn’t mean I shouldn’t be paying more than the minimum, if I can afford it. Paying any more than the minimum (even if it’s just $50 more each month) will save you quite a bit in interest in the long run. The more aggressively you pay back your loans, the less you will pay in interest and the sooner you can move on with your life.

Speaking of interest- if you can afford to pay more than the minimum, all of your extra payments should go towards the loans with the highest interest rates.

Here are a few tricks that will lessen the total cost of your loans and that will not burden you one bit:

• Loan servicers often offer a slight (.25%) discount on interest if you sign up to have your loans taken directly from your bank account. It is automated (yay! No worries and no late payments!) and a .25% reduction in interest on a 10 year, $50,000 loan comes out to be nearly $1000. I’d like a spare $1000, would you?
• Consider making your loan payments biweekly instead of monthly (this is especially good if you get paid every two weeks). This way you sneak in an extra month’s worth of payments without even noticing the difference in your paycheck. Suppose you pay $500 each month. $500 x 12 monthly payments= $6000…versus $250 x 26 biweekly payments = $6500. On a 10 year $50,000 loan at 7% you will pay your loans off in 9 years and save $2100 in interest. You never even noticed the difference.

Boom. I just saved you $3100 (and a year’s worth of making payments!) You can thank me in your Oscar acceptance speech.

• Have a relative with some spare cash? If you are responsible, have a steady income and have a good relationship with this family member, consider offering them the following: they pay your loans off up front and you pay them off to the family member at a slightly lower interest rate. If you were paying 8% on your loans before, offer your relative 5% interest. Set up a formal agreement with a payment plan (loan calculators are just a google away!) If you have proven yourself to be responsible, this could be a win-win: you get a lower interest rate on your loan, your family member gets a guaranteed 5% return on their investment. This won’t work for everyone, but it is an option to think about.

Just remember- even the president had crippling student loans. It happens to everyone (well, not those lucky trust fund babies…) but hopefully these tricks will make repayment a little easier on you.