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The Do's and Don'ts of Eliminating Your Student Loan Debt

The Do's and Don'ts of Eliminating Your Student Loan Debt

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• Updated: July 13, 2018

What’s difficult to avoid, almost everyone has it, and you struggle with it for years? It’s not the black plague. If you guessed student loan debt, then you are right on the money. Student loan debt afflicts 44 million Americans and 70% of those with a bachelor’s degree. What’s worse is that 2016 college graduates averaged over $34,144 in student loan debt! That’s why we decided to look at the do’s and don’ts when it comes to eliminating student loan debt.

Do get a part-time job while in college. This can work for your benefit in a number of ways. Any money you save from wages is money you don’t have to borrow. You’ll also have to borrow less, thus making your payments less than if you used your student loan money as your only income. It also has the added benefit of getting you to form good habits by budgeting and planning your savings.

Don’t take your full loan award. It goes without saying that the more you borrow, the more it’s going to cost you. Proponents of taking the full loan award would argue that this debt helps build your credit rating, which is important for young people. The problem with that argument is that the amount of debt you take on does not help your credit history. By simply having a student loan and making timely payments toward it will drive your credit score up, no matter how big or small your loan amount. Keep your student loan award as low as you can tolerate. It will equate to a lot of savings down the road.

Do make eliminating your student loan debt a priority. When you do land your entry-level job with its entry-level salary, you’re going to have to make some tough decisions on where to allocate your money. After all, you’re supposed to start saving for a car, a home, and retirement. With all of that in mind, it’s hard to prioritize where your money should go. We understand that there are circumstances that would make other allocations more important than student loan debt, but we recommend that you have a plan and stick to it. If eliminating your student loan debt is a priority then you’ll have to make sacrifices on something else.

Don’t wait until after college to repay. If you have that part-time job or some other source of income, then you don’t have to wait to start eliminating student loan debt. Of course, the obvious course of action is to distribute some of your paycheck toward the loan amount. However, the experts recommend something more aggressive. Take a portion of your paycheck and put it into an investment account. This money that you have earmarked for paying back your student loan can grow over time and offer you a device to pay off the debt in bigger chunks. There’s risk associated with this path, as is true for every investment, so proceed with this method wisely.

Do refinance your student loans. If you have one or multiple student loans, it’s a good idea to shop around for better rates. It’s worth the paperwork involved to save you money on your monthly payments. You’ll need a good debt-to-income ratio and a good credit score, but this one’s a no-brainer.

Don’t consolidate your federal student loans. While we do recommend refinancing your student loans, we also recognize the disadvantages of consolidating them in the process. It might seem practical to lump all your loans into one heap and make your life simpler by only having to make one monthly payment. Consider that if you consolidate your federal student loans, your interest will be the average of all your interest rates (rounded up to the closest one-eighth of a percent). Now you’ve lost the ability to eliminate the higher rate loans. Experts agree that when trying to eliminate debt, attack the higher interest rates first, because they’re costing you the most money.

Do establish an income-driven repayment if you’re struggling to make payments. This is not the preferred method for paying back your student loan, but we understand that a number of factors can contribute to causing you to struggle to make your monthly payments. For your federal student loans, you can establish an income-driven repayment plan that focuses a percentage of your income to the loan payments. You’ll pay more interest in the long run, because this will extend the life of your loan up to 25 years. The good news is that if there’s a balance after that, then the amount is forgiven. The bad news is that you have to apply for this repayment plan every year, and you lose certain protections offered by the government.

Don’t live above your means. Instant gratification, like when you impulsively buy that leather jacket, is a financial expert’s nightmare. Sound financial planning involves budgeting, saving and spending responsibly. It’s no secret that people are saving less and spending more. We recommend that you don’t fall into this trap. Paying off your student loan debt should be a big priority.
Some methods are easier than others to follow, and for some of you, others are just not possible. All the information and advice out there on what to do and what not to do can be confusing. If you make the right decisions, then you’ll save yourself a lot of money in the long run. The majority of college graduates are dealing with this issue, so it's time for you to get ahead of the pack. Take a hard look at your student loan debt, and use the do’s and don’ts above to come up with a plan to eliminate it.

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