Oh, student loans. We lament you!
Student loan debt is fast becoming a crisis to rival credit card debt. Currently, more than over $1.48 TRILLION is owed by about 44 million current and former students in America.
This means young people are saddled with $20k, $30k, $50k, even $100k in debt by the time they graduate, before they even think about buying a car or a house.
But what are you supposed to do? You have to get an education somehow, right?
While there is not nearly enough education out there on the fine print of student loans and how to minimize the debt you do have, the focus of this post is interest (don’t worry, we will have a post all about student loans!).
You know what really irks us about student loans?
Here we have a bunch of kids with little to no training or experience about how credit works taking out HUGE amounts of loans because they have no other means to pay for school. The worst part is that students can get loans for everything, all at a hefty interest rate. In fact, many students use their loans for far more than legitimate education and living expenses (Cancun, anyone?) without realizing they’re racking up serious debt. Basically, lenders are taking advantage of financially naïve kids.
Let’s look at current Federal Direct Student Loan rates.
While these rates don’t seem too high compared to some of the ones we’ve been showing you, 6 or 7% is a lot to pay for people fresh out of college without much income or savings. As a result, most people pay off student loans with minimum payments every month (or defer them), and you should know by now how that usually ends up.
As you can see, even with low to mid-level (compared to credit cards) interest rates the amount of interest you’ll pay over 10 years is pretty substantial. As always, the best way to reduce interest paid is to pay extra toward the principal as often as possible. This should especially be a focus once you have a stable job, and paying off student loans should be a priority BEFORE accruing more debt.
But this isn’t even the worst thing.
Most people know that student loans don’t begin accruing interest until you’ve graduated, and you’re usually allowed a 6-month grace period, right?
Not always. Did you know that some student loans start accruing interest when they’re dispersed? Your “grace” period is really their harvest period!
This means your loans may begin accruing interest when you get them, not when you graduate!
If you have Direct Unsubsidized, FFELP Unsubsidized, Direct and FFELP PLUS, or Private loans check your statements, because your loans are likely accruing interest as we speak. This means you may have several years of interest built up on your loan before you even start paying it back!
Don’t worry too much, though, you can begin paying your loan back the day after you obtain it. If you can afford to while going to school, a $50 or $100 payment each month will substantially reduce the interest you pay by the time you graduate. Or better yet, don’t take out as many loans in the first place!
Moral of the Story
Unfortunately, many people are backed into a corner when it comes to student loans, and they have to take whatever options are given to them. Despite the limited options, there are some things you can do to reduce the amount of interest you’ll pay on student loans.
First, take out as few loans as possible, and only use loans for school-related expenses.
Next, DO NOT defer your loans unless absolutely necessary, as interest will still accrue on them. When you do begin to pay back your loans, make more than the minimum monthly payment if possible.
Third, and most importantly, make paying off your student loans a priority BEFORE you look to accrue more large ticket debt items. You’ll soon need a car to commute to your new job, and maybe you’ll want to buy a house soon after.
While student loans may be necessary for many of us, they don’t have to cripple your financial situation. Keep the loans low, and pay them off fast. If you can, begin making payments while you are still in school.
Talk about Money Saved.
- Start Taking an Interest in Interest
- Start Taking an Interest in Interest: Mortgages
- Start Taking an Interest in Interest: Credit Cards
- Start Taking an Interest in Interest: Personal Loans
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