25 Jan 2017

Some Strategies for Paying Down Your Loans at a Moderate Pace

Some Strategies for Paying Down Your Loans at a Moderate Pace

If I've learned anything in my time writing about personal finance and student loans over the past few years, it's that every financial situation is different. Some people want to pay down their debt as quickly as possible, while some need to maintain as much cash flow as possible (which is very common for psychology professionals hoping to start their own firm).

The vast majority of new graduates fall somewhere in the middle. They want to get rid of their loans faster than the minimum payment allows, but at the same time maintain a reasonable quality of life.

You don't have to be extreme with your approach to student loans. People like me that have paid off large amounts of loan debt quickly had to go through some seriously uncomfortable times to get there. The most important thing is that your approach is the right one for you!

Here are some strategies you can use to pay down your loans at a moderate pace:

Be active during the grace period

"Grace." It sounds so nice, right? Unfortunately, the grace period on student loans can be one of the biggest pitfalls for new grads. Depending on the type of loans that you hold, you may not be required to make loan payments for as long as 6 months.

While that sounds great, it can hurt you in the long run. It's extremely common for interest to accrue during the grace period. That means a bigger loan balance than you graduated with. This was one of the mistakes I personally made before I started to pay off my $40,000 of student loans.

Do whatever you can to put money toward your loans during the grace period, even if it's an interest-only payment. This will help keep your loans much more manageable.

Build an emergency fund

If you're planning on tackling your student loan debt faster than normal, you'll want to have a strong emergency fund in place. While the common recommendation is three to six months of salary, even as little as $1,000 can be a cushion in the event of an emergency.

The main goal is that you want to avoid accruing higher interest debt (aka credit card debt) on top of your student loans. Any extra debt will severely damage your ability to make any real progress on your student loan balance.

Fully understand your loans

I talk to hundreds of readers a year, and this is almost always an issue for student loan holders. When I ask what type of loans they have, the most common answer is “I'm not sure.” There are massive differences between each type of federal and private loan program.

Even if you'd rather not look at your student loans (which is totally understandable), you need to. This will allow you to consider loan forgiveness programs or loan refinancing with the best information at your disposal.

Be sure to ask your loan servicer about the way extra payments are applied to the principal of the loan as well. Not every loan servicer handles this the same way, and it can lead to some confusion later on.

Research student loan rates

This is why having a full understanding of your student loans is so important! With interest rates as low as they are currently, there may be an opportunity to refinance into a lower interest rate while keeping the monthly payment reasonable.

There are plenty of student loan rate comparison tools available that are free to use. You will have to provide some basic information about your loans and financial situation, but generally these tools only use soft credit pulls, which won't hurt your credit score in any way.

Most of the lowest rates will likely come from variable interest loans. While those low rates may seem attractive compared with the fixed rate alternative, the interest rate could go much higher later on and make your monthly payment larger. The safest bet is to stay with a fixed interest rate, which will protect you from future rate increases.

Put your loan payment at the top of the list

Most people put their housing costs at the top of their budget. One of my favorite strategies for paying down debt is actually to make your loan payment the priority. When I was making larger-than-required monthly payments on my student loans, it was the first thing that happened after I got paid!

Once the money is gone, you can't spend it on eating out or the movies. This approach essentially forces you to take down your student loans at a faster pace.

Live well within your means

I remember when I received my first teaching paycheck after college. I had never seen $1,700 before. Unfortunately, too many recent grads fall into the habit of spending all of their bi-weekly or monthly paycheck. This makes it extremely difficult to add extra amounts to your student loan payments.

Remember that your career (and life) will be long. You don't need the nicest car or the biggest place to live right out of college in the beginning.

If you adopt that approach, you will see many of your friends with nicer things than you for the first 1–5 years after graduation. The biggest thing to remember is that those purchases are financed and will hold them back later down the road.

Opt for used cars and less house than you can afford, and you'll be able to knock out your student loans faster.

Above all, be patient

All good things come to those who wait. Careers take time to build, a business isn't successful overnight, and student loans won't disappear as fast as you want them to. Be consistent with any extra funds allocated toward your student loans, and recognize that debt freedom is a long-term goal instead of a short-term one.

In my next post, I'll take a look at a conservative approach to paying down debt. In the meantime, if you are ready for a more aggressive approach, check out my earlier post here.

-- Bobby Hoyt is a former high school teacher who paid off $40,000 of student loan debt in a year and a half. He now runs the personal finance site MillennialMoneyMan.com full-time, and has been seen on CNBC, Forbes, Business Insider, Reuters, Marketwatch, and many other major publications.

The opinions and advice expressed in this article are those of the author and do not necessarily reflect those held by the American Psychology Association (APA).

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