This article is part of a series called Graduating? which focuses on personal finance advice for fresh college grads. This particular article is a guest post written by Miranda Marquit.
With the federal government getting stingier with financial aid programs, and with education costs rising, it is no surprise that many people have to turn to private institutions for some of their college costs. This is especially true if your higher education includes school beyond a four-year degree. The costs are higher, and the financial aid is even scarcer. Not surprisingly, most college grads now have three sets of debt: credit card, government student loans and private students. Here are some tips for repaying your private student loans:
Pay private student loans off before you pay off government student loans.
You’ve probably noticed that your private student loans have a higher interest rate than your federal loans. And most private student loan rates are variable to boot. Right now that’s not such a big deal, with interest rates falling, but that could change in another year or two. Federal loans can be consolidated to low fixed rates through special programs. Much of the time private student loans do not get that same special treatment. Indeed, private student loans are often treated as consumer debt by many lending institutions.
If you’ve got your credit card debt paid off, move on to the private student loans. The sooner you pay them off, the better.
Pay more than the minimum each month.
The cardinal rule of debt reduction is to pay more than the minimum each month. If you have paid off your credit card debt, take all the money you’ve been using for that purpose and transfer it to help you pay down your private student loans. If you want to be extra clear about where the money should go, write two separate checks. Fill out one regularly, with the minimum payment, and fill out another with the extra amount. In the memo area write, “Apply to principal.” This will make it perfectly clear that you want the extra payment to got toward reducing your overall debt. This will also help you save on interest costs, since interest charges are figured using the size of the principal balance.
Start as soon as possible.
Most private student loans have the same six-month grace period that you find on other student loans. However, just because you aren’t making payments doesn’t mean interest isn’t accruing. In fact, interest has been accruing the entire life of the loan. And many private loans will capitalize the interest at the end. This means that they add up all the interest charges, and then add them to the principal balance. You end up paying interest on your interest charges.
If you can afford it, make interest payments as you go along to avoid having it capitalized at the end of your schooling. If you don’t need the six months grace period after you graduate, start making loan repayments immediately. You’ll get done faster, and pay less overall. My husband is not actually done with school yet, but we’re repaying his private student loans right now. We figure that the sooner we pay off the loans, the less we’ll owe over all — especially since none of the interest is being capitalized.
Repaying student loan debt can be a daunting task. You can save money in interest charges if you make a plan and get started as soon as you can.
Miranda Marquit edits information on debt consolidation for DestroyDebt.com. She is also a personal finance writer for AllBusiness.com and her work has appeared on The Huffington Post.
Photo by manmadepants
Just stopped by to take a look. Good info and great Blog.. Thanks!
I believe that many college students fail to think about what life will be like after college with huge loans to pay off.
It is excellent advice to begin paying off the loans as soon as possible even while still in school if it can be managed.
Interest is a monster (unless you have it working for you) and must be controlled and eliminated asap.
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You need to be very careful with credit card debt in particular. I think some people forget they are only a short term solution and unlucky students can take years paying them alone off due to the interest rates. Switching to a low interest loan shouldn’t be overlooked to reduce the interest you eventually pay.
This is one of the ways people are “helped” right into debt. If student loans weren’t available, colleges would have to be more affordable (college costs, like healthcare costs–thanks largely to insurance–have increased unreasonably more than other expenses). Put easy-to-get student loans into the equasion and it’s great for the school and not so great for the student who graduates with practically the equivalent of a mortgage! Now, THERE’S a “helping hand” to a great start! Some of these intended (?) to be helpful schemes actually end up hurting people. (Like help the welfare mom have more kids. . .)
The one thng that students should avoid is getting into credit card debt. some student use the excuse to use for school necessities but the fact of the matter is most students are tem-pted to use it for some personal purposes which will have some dire consequences. And as much as possilbe do not get private student loans as they are more expensive to deal with. Their interest rate is hihger than that of your federal student loans.
I would suggest that working while studying would be better if you can persevere and can work hard.
It would be harder to start your post graduate studies repaying all your indebtedness and feel like putting your life on hold for a while.
Well said! This article really explains and dug deep into the ills of what happens to a student when their parents cannot afford to put them in university or college from the parents own pocket. The federal student loans is never enough for a student so the recourse is to some from private lenders and in addition they will be offered credit cards which is to the evil of lending. So when you finally finish college if you’ll make it, you three types of indebtedness which is like another mountain to climb instead of starting your life on a good footing.
The best thing to do is to work while going to university and avoid credit cards.
I am a recent graduate and I have been having a hard time finding a company that will consolidate my private student loans. The few that I have found have variable APR which isn’t a big deal right now with interest rates lowering but it scares the hell out of me that it will snow ball out of control at some point in the next 15 years.
Please if anyone knows of a good company, I would appreciate you sharing..