What are the best ways to tackle student debt? 2 impartial experts weigh
Betsy Mayotte lives in the world of student loan counseling. She runs a non-profit association, freestudentloanadvice.org, and is the president and founder of The Institute of Student Loan Counselors. But even she was shocked when she made her first AMA on reddit and received 1,200 questions in a single day, from anonymous users who only knew her as u / Betsy514.
“It’s kind of telling me. The fact that so many people are reaching out to strangers on the internet in a place like Reddit for help with something as serious and impactful as a student loan, ”Betsy said. Reverse. “This tells me a story about how desperate borrowers are to seek help.”
The ins and outs of student loans are incredibly complicated – and there aren’t many people interested in making it easier. Investigation found that 55 percent of borrowers are worried about how they are going to repay their loans, but only 30 percent have actually received training on how to do so.
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This is where Mayotte and other experts, like Marc Kantrowitz, the vice president of research and publisher at Savingforcollege.com, enters. Reverse spoke to two experts about the best strategies for tackling student debt and the important pitfalls to avoid when you get started.
Warning: Everyone’s financial situation is different, so here are some places to start. For specific advice, try r / Student loans. It’s about as warm and fuzzy as a community dedicated to paying off a loan can get.
The first commandment of debt repayment
Let’s start with the main features. When it comes to interest rates on student loans, time is not your friend.
“The only cardinal rule that applies to everyone is that the name of the game pays the least over time,” says Mayotte.
You can do this by making additional payments to reduce the length of this Greendayonline / instant loans in your life. There are two ways to look at these extra payments: there’s the avalanche, and then there’s the snowball method. If you have the cash on hand to deal with this loan, target this loan with the highest interest rate and attack it as quickly as possible.
This is the avalanche method, which Kantrowitz also described on his site.
The alternative is the snowball method. Which means you tackle the smaller loan first, hoping to get a “winner” (his word) – which may sound like a motivator. big loans first.
“The avalanche method beats the snowball method for student loans.”
“Most student loans are big enough to pay off that debt for years and years, not just a few months. There is a difference between a credit card, which pays off over months or years, and a student loan, which pays off over decades. The avalanche method beats the snowball method for student loans, ”he says.
Mayotte adds that the snowball method can be useful for some people with certain “financial personalities”, but generally speaking, it is better to get out of the loan at the highest interest rate as quickly as possible.
With that strategy in hand, here are the details to keep in mind as you plan your attack.
3. Get organized
Before doing anything, Mayotte explains that everyone facing student debt should bookmark these pages: The Ministry of Education, studenloans.gov, and its website freestudentloanadvice.org. You can also add Kantrowitz’s page to your favorites: savingsforcollege.com.
Now the next thing is to make a spreadsheet of all your loans.
On this worksheet, list the amount borrowed, the due date of each payment, the interest rate, and the amount of each monthly payment (assuming you plan to repay over 10 years). Also keep track of important contact information, just so it’s handy.
From there, you can start researching how you plan to deal with the loans with the highest interest rates. Mayotte recommends starting here, with the will of the government student loan repayment estimator.
Then, Mayotte advises you to re-evaluate your plan at least once a year, to make sure you’re still on the right track. “Just as you check your smoke detectors every year, you should check your repayment strategy. ”
2. Be smart about consolidating and refinancing
Consolidating multiple loans into one loan with one interest rate and one payment each month seems blissfully simple. There are reasons to be cautious about this.
When you take out multiple loans and combine them into one, a new interest rate is calculated. This interest rate is the weighted average of all your loans combined, then rounded up to one-eighth of a point. There is a ton of online calculators this can help you determine exactly what these new payments would look like.
“You might be better off making individual payments on the highest interest rate loan and paying it off as quickly as possible.”
If you consolidate to try and reduce a monthly payment into something that works better for you, it may lower a monthly payment, Kantrowitz explains. But if you end up extending your repayment term, you’ll end up paying more over time.
“It can lower your monthly payment because when you take out a consolidation loan, you extend your payment period,” he explains. “You can’t target a payment just on the loan with the highest interest rate. You might be better off making individual payments on the highest interest rate loan and paying it off as quickly as possible, as those other loans will have very low interest rates, ”he adds. he.
Then there is the refinancing. If you have federal student loans, Mayotte and Kantrowitz add that 99% of the time they advise against refinancing into a private loan program. This is largely because you lose the forgiveness options inherent in federal loan programs.
“I only recommend refinancing a federal loan in the private program for people who have a very stable source of income, preferably a household with multiple sources of income and an extremely strong emergency fund – and if their payments are affordable to them now, ”Mayotte said.
For people who already have private loans, she advises finding out if you have an interest rate above about six percent. But she cautions that only people who get “special offers” are people who really are the cream of the crop, when it comes to credit.
“For people looking to refinance for a better interest rate, I recommend that they take a year or two of on-time payments before they start exploring what they’re eligible for, as this could improve the odds of getting a better interest rate. ‘get a lower rate,’ she said.
1. Don’t get ripped off
The reason Mayotte started their non-profit organization is that there are a multitude of student loan scammers out there. On the r / StudentLoans subreddit, she lists several important ways to identify them. But in general, here are a few things to keep in mind.
Asking high fees up front, says Kantrowitz, is a red flag. And if they charge exorbitant fees and claim they can negotiate, or guarantee lower payments, he also advises to steer clear. Mayotte adds that by avoiding them you are protecting yourself and not missing out on much anyway:
“I still see many desperate borrowers falling victim to these scams. They charge for thousands of programs that borrowers can access easily and for free by working directly with their loan officer.
There might come a day when student debt is actually canceled en masse. But until that happens, there are helpful people who are ready to answer questions, and they will do it for free.