Congratulations on graduating and obtaining that wonderful piece of paper that will serve as the backbone of your career. Even if you don’t use it directly and enter a different field, you still acquired valuable skills. I hope they truly were valuable because now it’s time to pay for them. If you took out a loan to pay for school then you were among 69% of Americans to do so in 2019.
Many new graduates don’t know what to do and how to go about it. The lender will send you some documentation, tell you how much you owe each month and you think that’s it. Can you follow their proposed plan? Sure, but you will be going at it for at least 10 years until your student debt is paid off. If you are making regular payments and are never late then it will help you build your credit score. However, should you decide to buy a house while still paying off the loan, the monthly payments will subtract from your maximum approved mortgage. Most importantly, though, you will be paying a substantial amount in interest.
At the time of writing, the federal student loan interest rate for an undergraduate degree was 3.73%. If this rate was maintained for the full 10-year period for the average loan of $30k (that was also my owed sum), the total interest paid would be $5,971. That’s almost 20% of the total sum borrowed! Should that rate rise to 5% by the time you have to start paying your student loan, the interest paid jump up to $9,341 or 31% of total sum borrowed. The highest rate in the last 15 years was 6.8% leading to $11,436 or 38%. You get the point. The longer the amortization (repayment) period, the larger the interest paid will be.
What can you do differently?
Paying off that pesky student debt should be of utmost importance. The ideal place to start is as soon as you land your first job out of college. Allow me to explain. While in school, you likely were not making any money or at least very little compared to your new job. You learned to be thrifty and most likely lived with roommates. However, if you were fortunate enough you were able to live at home with your parents.
Right now, the best decision you can make is to extend that “lifestyle” for 1-3 years. Be cheap, be “broke”, and make as many payments towards your student debt as possible. By embracing the thrifty student mentality while earning a salary, you will either fully pay off the debt or at least make a nice dent in it. After all, making payments against $10k is much easier than against $30k. Remember, all additional payments will go directly towards the principal amount. The interest payment will then be calculated on the lower sum. Every additional payment you make will reduce the total amount of interest paid over the course of the loan.
I was not fortunate enough to be able to continue living with my parents after school as my new job was too far to commute. My solution – roommate. Work out your expenses that must be covered (rent, utilities, car, insurance), add in groceries and a buffer for entertainment (we are human after all). Build up a reserve for at least 2 month’s worth of rent (goal is 6). Remember, whatever you return you will not be able to draw on should you need it, hence the reserve. Now you are ready to go full force and attack the debt!