If you are one of the 44 million borrowers saddled with student loan debt, it can be a heavy burden to carry. According to Forbes, student loan debt is the highest it has ever been at more than $1.5 trillion. That ranks second, behind only mortgage debt, as the highest consumer debt category. The Institute for College Access and Success pegs the average amount owed for borrowers in the 2017 class at $28,650.
There are many contributory factors to the student debt crisis, but three in particular stand out. The first is the cost of education. Using inflation adjusted data for Americans 25 – 34 years old, as reported by the Philadelphia Inquirer, the cost of a four-year public education is 2.5x more expensive than it was in 1977. The second factor is the median level of debt has increased 3.3x. And lastly, the median income has stayed exactly the same at $34,000. Simply stated, we have a situation where costs are going up, debt levels are going up but income is staying the same. This is otherwise known as a recipe for disaster.
Beyond the dollars and cents, carrying high levels of debt can affect your mental and emotional well-being by causing stress, anxiety, insomnia and even feelings of isolation. Financial anxiety is no stranger to most Americans. However, letting it overcome you will not make it go away, it will only make it worse. There are strategies to tackle your debt and begin on the road to financial freedom.
First Things First
The first step is to know what debt you have, as in how much is owed, are they federal or private loans, and what interest rate (cost) you are paying? This information is important and a needed first step in making a plan to tackle the debt load.
Spending and Cash Flow
Now that you have a clear picture of your debt, it is important to prioritize your monthly spending. It’s unwise to sacrifice all other planning and opportunities due to the overhang of the student debt. For example, you need to work on building an emergency fund to cover the unexpected turns in life. Everybody’s circumstances are different but a good rule of thumb is to start by shooting for two to three months of expenses.
An opportunity that you should take advantage of because it will pay off in the long run is your 401k and IRA’s. Not saving for your retirement simply because you have debt is a bad idea. There are tax benefits, possible matching money contributed by your employer and not to mention, the greatest benefit of all which is the opportunity for compounding interest on your investments over time.
Making the Payments
Depending on your monthly cash flow, the quickest and most efficient way to tackle your debt is to pay more than what is owed. If you are able to get into the habit of putting even a little extra per month on top of the minimum this will save you money over the life of the loan. If this is not an option based on your circumstances then look for opportunities throughout the year to add to your payment by using extra funds that you may earn from a bonus, raise or side gigs. The takeaway here is that anytime you can accelerate your payments beyond the minimum, you will save money in interest charges that otherwise would be applied to the loan.
Restructuring: Consolidation vs Refinancing
Consolidation typically refers to federal student loans that get combined and repackaged as one loan with an extended term. Since the term of repayment has been extended, the monthly payment most likely will go down. The interest rate will be fixed but it becomes a weighted average of your previous loans that were combined. Bottom line, if you pursue this option, do know it is free and can be done online through the Department of Education. Take a skeptics approach and perform due diligence on any service offering to handle your consolidation for a fee.
Refinancing, while technically a form of consolidation, largely centers around private lenders combining your private student loans into one. If you have both federal and private loans, they can be refinanced together as well. The lender will look at your entire financial picture to determine the refinancing offer so the terms and interest rates will vary. Depending on such things as your credit score, job and salary, it may or may not make sense to refinance so be sure to evaluate each lender and offer on its terms to understand total costs.
Get Started Now
Whether it’s student loan debt, credit card debt or even just concerns over retirement planning or preparedness take the time to sit down with a financial advisor and establish a plan designed to meet your specific needs. Our firm provides this type of guidance in a complimentary fashion and as an independent fee-only RIA we always act as a fiduciary and do what is in our client’s best interest. There are many free resources available and addressing your financial future now will be beneficial on so many levels. Let us know if we can help.