The cost of higher education in the United States is on an ever increasing trend upwards and shows no signs of slowing. While there has been some discussion at the federal level on ways to control college costs, no actions have occurred to actually curb the cost. Unfortunately, the only action relating to college costs that appears on the horizon is an interest rate increase on new borrowers. This in turn will lead to an increasing debt load on our college graduates.
Not everyone is lucky enough to receive scholarships or have family members that can contribute to college costs. For those who do take loans, they can be burdened financially when they are beginning their careers. Most are faced with the question of “How do I best repay my loans, and how quickly?
The first thought when most college graduates start repaying their loans is to try and repay everything quickly. Although, that may not be the best idea. A new study shows there is little evidence you actually benefit from paying off loans “quickly”. Some university officials say those with higher debt may do better following a 10-year-repayment plan, because rushing payments could divert them from starting a 401 (k), starting a family, purchasing a house, or enrolling in graduate school.
As long as the interest rate is low, borrowers with federal student loans are advised to take advantage of a full re-payment term. This way, extra cash can then go towards other priorities, such as credit cards, retirement plans, or family plans.
No one likes living under debt, but it is important to examine your debt carefully and separate the good debt from the bad. The “good” debt would include debt such as student loans, mortgages, and responsible car loans. “Bad” debt would include credit card debt, cash advances, or other higher unsecured consume credit lines. If you have questions, speak to a financial advisor about which debt is “good” or “bad”, but a general rule is to rank them by interest rate. Student loans, mortgages, and car loans tend to have lower interest rates. Consumer credit cards and loans tend to have higher rates, sometimes even exceeding 20%.
Another good rule to abide by when you are first starting a career and managing student loans is that if you need to pay for something via a credit card or cash advance, you can’t afford it. Credit cards should be used for emergencies, or be paid in full each month. Cash advances should almost never be used. If you find yourself needing to use a credit card every month and carrying a balance, re-examine your spending habits and look at what your buying.
Managing student debt is just like managing other debt. Make regular, on-time payments to your creditor, but do so responsibly. If you need to lower your payment, speak to the agency and find out your options. Most agencies will work with you regarding your payments. They loaned the money to get repaid, not have you default. If you have specific questions, contact your trusted financial advisor for more information.
Source: Fidelity Investments