Student loans have always been a source of discontent, but according to the Federal Reserve the problem has worsened exponentially in the last decade. In fact, student loan debt has soared from $260 billion in 2004 to $1.2 trillion in 2014. A recent article from MarketWatch states that about 40 million Americans are carrying some student loans and about 70% of students graduate college with an average of $35,000 of debt.
Student debt has the potential to become a road block to the American dream of owning a home, or even buying a car or making other purchases that fuel economic growth. Many graduates can’t afford to pay back their loans, as evidenced by the fact that only 37% of borrowers are actually paying down their student loan debt.
The good news is there are ways to avoid the credit flaws that result from unpaid student loans. The first step is not to avoid the problem, but instead face it early and create a plan of action that includes the following:
Step 1: Consolidate your loans.
If you relied on student loans to pay for college, it’s quite possible that you may be carrying a dozen or more separate loans. It’s not easy to keep track of all those loans and determine the amounts due each month. Consolidation can streamline your payments by replacing multiple loans with a single loan. But be careful when consolidating. You should not consolidate private loans with federal loans, and pay close attention to the interest rates associated with each loan to ensure that the consolidated loan will not require you to pay more in interest over time.
Step 2: Set up a payment plan and stick to it.
Many students choose to defer their loans for a period after they graduate college. But the smartest thing you can do is to establish a repayment plan early and pay off as much as you can afford. According to the U.S. Department of Education, loans with the Standard Repayment Plan must be paid off in 10 years. There are other plans that allow loans to be paid off in shorter or longer terms. Choose the plan that makes it affordable for you to make your student loan payments while still paying the rest of your bills.
Step 3: Live frugally.
Most college students have to learn to live on a tight budget. But upon graduating and getting a job, it can be tempting to reward your hard work by getting an expensive apartment, car, and other splurges. Be mindful not to live beyond your means; student loans and other monthly expenses can add up and you need to have the funds to pay them.
While these three steps can be easily stated, they are not as easy to implement. Resist the urge to use a credit card to pay off your school loans, as this would likely result in higher interest payments. Credit card debt could also affect your qualification for future loans. If you are stringent about controlling your expenses and sticking to your payment plan, you will reap the benefits over time.