What Are the Best Strategies for Managing and Minimizing Student Loan Debt?

“College years are the best years of your lives.” It is exactly what our parents, relatives, and acquaintances who graduated from college told us. But it’s hard to celebrate your college graduation day with a student loan hanging around your neck. It is no time to google “what is the average credit score” in order to find a quick way out.

College doesn’t end until you pay off your entire loan. It sounds unfair, but such a grim reality awaits everyone who takes out student loans. Students have six months after college to make their first loan payment; for most of them, that’s not how they want to start their adult lives. 

Managing Student Loan Debt 

Managing a student loan is a very complex and demanding task. But there are a few tips that can ease your burden without wasting much of your precious time looking for information because this article contains all the basic steps to achieve repayment of your loan. 

  • As with all types of loans, the first thing to do is calculate your total debt. Only by knowing the total debt amount will you be able to develop a plan for paying off the loan, consolidating it, or possibly applying for and receiving forgiveness. 
  • Each of your loans may have a different interest rate and different repayment rules, so you should read the terms and conditions of each loan right away. This information will allow you to avoid additional interest, fees, and penalties and develop a payback plan. 
  • If you review your contract in detail, you will notice that each loan has its own grace period. A grace period is a period after you graduate, during which you are not required to make payments on your federal student loans. The grace period depends on the type of loan you have. It is important to note that some types of loans charge additional interest during the grace period, which means your amount will be higher at the end. 
  • One way to reduce the burden on your monthly expenses on covering the debt is loan consolidation. What is it? It is the process of making all of your loans into one loan, resulting in a single monthly payment. When you consolidate your loans, they will turn into one new loan with a fixed interest rate which can be even lower than any interest of all your current loans. This process can minimize the risk of missed payments or default on loans. 
  • One of the best ways to pay off a student loan is with a debt avalanche strategy. First, you pay off the loan with the highest interest rate, and for all other loans, you make the minimum payments. As soon as you pay off this debt, go immediately to a loan with the second highest interest rate, and so on, until you pay off all your debts. 

Example of a Debt Avalanche Strategy

Mary has three student loans with balances of $20,000, $10,000, and $15,000. The interest rates on these loans are 8%, 4%, and 6%, respectively. Using the debt avalanche strategy, Mary would prioritize paying off the student loan with a balance of $20,000 first since it has the highest interest rate. Mary would continue making minimum payments on her student loans with an interest rate of 4% and 6% and put any extra money towards paying off the credit card debt as quickly as possible. Once that loan is paid off, she would move on to the next highest interest rate debt. 

  • Another strategy is to pay extra whenever you have extra money. The faster you reduce the principal amount, the less you will have to pay in the future — additional cash to get with savings on non-essential expenses. 
  • Some student loan lenders agree to give you a discount on the interest rate if you agree to automatically set up your payments to be withdrawn from your checking account each month. Therefore, be sure to ask about this issue when obtaining a student loan. Federal student loans offer several repayment plans, including income-driven repayment plans, which can lower your monthly payments and help you manage your debt. 
  • You should consider increasing your income to pay off the loan. It is likely that at your first job, you will not get an immediate promotion, but there might be overtime available. Or you can also take a part-time job — all it can bring you additional money that is used to pay off your debt. 
  • While student loans may seem like a lot, don’t forget that you still have other areas of your life where you have to invest a lot of money. Your priority should be to be able to pay the minimum of all your student debts. Do not prioritize student loans over everything else. You may have other debts, such as credit card debt, and it would be much wiser to pay that off first because it likely has a higher interest rate. 

How To Avoid Defaulting On Student Loans 

According to the Federal Reserve, the level of outstanding student debt in the United States reached $1.75 trillion by the end of 2021. The student debt burden has more than tripled over the past 15 years, which is one of the reasons for the calls for student debt relief to grow louder and more frequent. Student loans are the second largest category of household debt in the U.S., trailing housing debt by a wide margin. 

Source: https://www.statista.com/chart/24477/outstanding-value-of-us-student-loans/ 

It is worth noting that if, for some reason, you do not make monthly payments within 90 days, you are out of line. If this continues for 270 days, you have defaulted, which can lead to very serious consequences. You may be charged late interest if you overstay your federal student loan payment. 

Eventually, the government can deprive you of up to 15% of your salary and social security benefits. If you are unable to make a payment, contact your loan servicer and ask for a delay or waiver. It will not harm your credit history. 

If, for example, you lost your job, you could temporarily stop payments on federal student loans. But your loans will accrue interest. I would like to point out that it will not hurt to request a free credit report every year to make sure you are fully informed of your payment history. 

The Bottom Line 

The main thing I would like to highlight is whatever you do, don’t default. If you are unable to make a payment, contact your credit institution, and they will help you resolve your issue. With help and advice as soon as possible, you can create and follow your own plan that works for you and your budget. 

Remember, managing and minimizing student loan debt takes time and effort, but it’s worth it in the long run. By being proactive and taking steps to reduce your debt, you can set yourself up for financial success after graduation. 

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