Paying off student loans

Ah student loans, seemingly so innocent when signing the promissory note but in reality deadly serious. Why do I say that? Federally backed student loans are not dischargable in bankruptcy! That means you will pay them off no matter what even if the government needs to garnish your social security check when you are old and gray. So let’s get them paid off ASAP.

Where to Start

  • Take note of the interest rate, total balance and monthly payment
  • While you want to get these paid off soon the interest rates aren’t that high compared to credit cards. Try to pay high rate debt like credit cards first so the principal doesn’t build up.
  • Make sure to not default or there will be significant penalties, late fees and higher interest rates. Get a second job or cut back significantly if you need to. Make each payment religiously.
  • Pay as much as you can each month, meaning pay more than the monthly amount to get the balance down. Live like a grad student if you need to. Hello ramen flavors and roommates.
  • If there is a loan with a smaller balance pay that off first even though this seems counter intuitive. The reason for this is to get this extra bill of our back so we can focus on the big ones. Back in the day I had a small Perkins loan for $2000 that was small and annoying to pay so I paid it off to focus on the big balance loan solely that was around $38,000.
  • If you are still in school you can defer but often interest build on the principal still
  • If you work in the public sector there are certain programs that allow for debt forgiveness after ten years but getting that forgiveness is very hard under the current administration. Investigate these options but don’t count on it.
  • Above all keep at it. The interest rates are low enough that the interest payments are ok. You will be paying off principal too.

Before going to college or grad school

Consider your school choices carefully. Slick websites and brochures are nice but loans need to be repaid. Look at the ROI of the program you are attending very carefully.

If two schools are comparably ranked you may want to consider the cheaper one. Slick diplomas are nice but $1200 per month student loan bills will crimp your style for years.

Consider working part-time in school to reduce borrowing. Work all summers.

Hunt for scholarships both need based and merit based

College cost example #1: Frankie Finance

Frankie is going to college. He gets into a number of schools but decides to go to State U as the finance program is good and the price is reasonable. State U also has a low living costs as it is in a smaller town His total debt upon graduation is $30K as he worked summers, paid in state tuition,worked a side job and lived frugally.

His student loans are through the government at a rate of 5.5% over ten years. Frankie’s monthly loan payment is $325 per month. He has no problem paying this off. He pays it off early so he doesn’t have to make $39K in total payment, meaning $9K in interest. Instead he pays it off in five at $573 per month paying $4382 in interest. Way to go.

College cost example #2: Uppity Ulysses

Uppity Ulysses has the same scores and grades as Frankie. He also plans to major in finance. Ulysses goes on a college tour and falls in love with City U. It is in the nearby big city and is a private university ranked about the same as State U in US News and World Report. Ulysses does not want to live in a smaller town even though he is also admitted to State U. The programs are comparable in nature. Due to high cost of tuition and high cost of living Ulysses graduates with $120K in student loans.

Uppity’s student loans are also through the government at a rate of 5.5% over ten years. His loan payment is $1302 per month. The loan payments end up eating up much of his disposable income. Ulysses can’t afford to go out and do things like Frankie. He drives a beat up old Camry and doesn’t save for retirement. Uppity can’t afford cable TV or travel. He regrets his choice to attend City U. He also considers bankruptcy but his student loan cannot be discharged so he has to skimp, work hard and do side jobs to pay the bills. Eventually he recovers but it takes ten years of hard living.

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