Advertising
Advertising

The Smartest Way to Pay Off Your Student Loans

The Smartest Way to Pay Off Your Student Loans

Graduation is just around the corner for millions of college seniors around the world. Concerns like college rankings, mid-terms and essay samples will be a thing of the past. Of course, these will be replaced by new worries: finding a job, deciding on grad school and for most, the dreaded student loan repayment.

In today’s economy, students have more debt than ever before; some estimate the total amount of student loan debt is well over 1 trillion dollars in the United States alone. While these numbers are daunting, the repayment process doesn’t have to be. By following some simple suggestions, you can reduce you burden and your overall interest payments without living like a broke college student for the rest of your life!

Student loan

    1. Pay a little extra.

    Once you get started with your loan repayments, you might be feeling a little strapped for cash each month. The thought of sending them MORE money might seem a bit of a stretch. However, if you can manage to send even just $5 extra per month, even if it’s not every month, it can save you thousands in interest over the life of the loan. Experts estimate that for every extra dollar you spend, you can cut up to $2 off at the end. That can add up quick!

    Advertising

    square mobile payment

      2. Biweekly payments.

      It may sound strange, but sending in half of your loan payment every two weeks will save you thousands of dollars. In addition to paying less interest, you also manage to make an extra full payment every year. Consider the approach, especially if you are paid biweekly.

      4 Money-saving Ways To Make a Vacation Cheaper

        3. Sign up for automated payments.

        Contact your lender and ask about this option. Most will allow you to have your payments automatically withdrawn from your checking or savings account on a regular interval you set up. The other good thing is that lenders will often lower your interest rate by as much as 0.25% if you make automatic payments. It may not sound like much, but it could knock a year, or more, off the life of your loan.

        Advertising

        You can also have the payment automatically deducted from your paycheck; it won’t hurt nearly as much as writing out a check will. Because you never get to see the money, you won’t miss it as much!

        save_money-banking

          4. Let the tax code work for you for a change.

          One of the good things about student loans is that the interest you pay on them is tax deductible, meaning you can subtract it right from your gross income. This means fewer taxes paid and usually a bigger refund for you.

          For example, if you pay $2,000 in interest on your loans in one year, and are taxed at a rate of 25%, that’s $500 less you owe in taxes, or $500 more in your refund check. If you turn that around and apply it as an extra payment towards your student loans, it means you will effectively be using the government’s money to lessen your debt.

          Advertising

          You Can Save a Ton of Money With Financial Compartmentalization

            5. Pay off variable rate loans first.

            If you have some loans that have a variable interest rate, consider paying them down faster first. While they may have a lower rate than your fixed rate loans, that can change quickly. As the economy improves (hopefully), interest rates can rise drastically, catching you off guard and raising your monthly payments significantly. You might even check into converting these to a fixed rate option. It never hurts to talk to your lender.

            31 Things To Do When You Have No Money

              6. Consolidate.

              This option may not help newer loans that have a fixed interest rate, but for older loans, you can often consolidate them into one monthly payment. This is often at a rate lower than what you are paying on the individual loans. Even if you don’t get a better rate, it may still be easier for you to make one payment per month instead of several.

              Advertising

              think about what you can do with the money

                7. Get someone else to pay it.

                While this sounds like a great idea, it’s not what you think—unless you have a rich uncle willing to write the check, that is! What you might seriously consider is that some companies that hire college grads may be willing to pay a lump sum payment towards your loans as part of your compensation package.

                You will probably have to accept a reduced salary, and agree to work for them for a specific number of years, but the reduced interest and length of time required to pay off your loans could make it worth it. Consider this option when you get to the salary negotiations stage or at your annual review if you are already working.

                No matter what you get your degree in, if you have student loans, repayment is soon going to be a reality for you. If you use some of these tips, you could easily save yourself thousands of dollars over the course of your loan. That’s no small change for simply applying some of these mostly painless suggestions.

                More by this author

                Google and Their Educational Programs The Smartest Way to Pay Off Your Student Loans young IT intern Make The Most Of Your Internship in 7 Easy Steps Student Guide to Effective Note Taking 10 Most Useful College Degrees In 2013

                Trending in Money

                1 How to Set Financial Goals and Actually Meet Them 2 10 Steps To Help You Make Your First Million Dollars 3 21 Money Making Ideas to Try At Home Now 4 10 Best Ways to Save Money Faster and Smarter 5 8 Best Finance Apps For Effective Budget Tracking And Planning

                Read Next

                Advertising
                Advertising
                Advertising

                Last Updated on November 27, 2020

                How to Set Financial Goals and Actually Meet Them

                How to Set Financial Goals and Actually Meet Them

                Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

                In this article, we will explore ways to set financial goals and actually meet them with ease.

                4 Steps to Setting Financial Goals

                Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

                1. Be Clear About the Objectives

                Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

                It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

                Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

                2. Keep Goals Realistic

                It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

                It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

                3. Account for Inflation

                Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

                Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

                For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

                Advertising

                4. Short Term Vs Long Term

                Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

                As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

                By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

                How to Achieve Your Financial Goals

                Whenever we talk about chasing any financial goal, it is usually a two-step process:

                • Ensuring healthy savings
                • Making smart investments

                You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

                Ensuring Healthy Savings

                Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

                This is the focal point from where you start your journey of achieving financial goals.

                1. Track Expenses

                The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

                Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

                If you’re not sure where to start when tracking expenses, this article may be able to help.

                2. Pay Yourself First

                Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

                Advertising

                Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

                The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

                Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

                3. Make a Plan and Vow to Stick With It

                Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

                Nowadays, several money management apps can help you do this automatically.

                At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

                Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

                You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

                4. Make Savings a Habit and Not a Goal

                In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

                Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

                • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
                • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
                • If you go shopping, always look out for coupons and see where can you get the best deal.

                The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

                Advertising

                5. Talk About It

                Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

                Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

                6. Maintain a Journal

                For some people, writing helps a great deal in making sure that they achieve what they plan.

                If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

                When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

                Making Smart Investments

                Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

                1. Consult a Financial Advisor

                Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

                Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

                2. Choose Your Investment Instrument Wisely

                Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

                Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

                As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

                Advertising

                3. Compounding Is the Eighth Wonder

                Einstein once remarked about compounding:

                “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

                Use compound interest when setting financial goals

                  Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

                  Start saving early so that time is on your side to help you bear the fruits of compounding.

                  4. Measure, Measure, Measure

                  All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

                  If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

                  Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

                  The Bottom Line

                  Managing your extra money to achieve your short and long-term financial goals

                  and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

                  More Tips on Financial Goals

                  Featured photo credit: Micheile Henderson via unsplash.com

                  Reference

                  Read Next