6 Steps to Escape Student Debt Prison
“A full 85% of millennials who created student debt now regret doing so.”
— Business Insider survey
Student loan debt is the Godzilla of all financial regrets for our younger generations. This debt is the most complained about debt of our modern era. Let me be quick to add that the student loan payers said they do not regret obtaining their education; they just regret the debt they racked up to procure it.
The sad part is, when students created their school debt, most did not know or understand it would take them decades to pay it off. The average college debt ($20K to $39K) takes around twenty years to resolve. The average student loan payment (about $30K) has been calculated to cost around $393 a month. Of course, it will take much longer if you borrow more to obtain an advanced degree—possibly up to thirty years to pay off $60K or more.
Student Loan Debt Calculator to run what-if scenarios:
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It is more than likely that you will end up paying interest on the interest when you make your payments. After all, student loans are compounded daily, and the amount grows quickly. This creates a growing payoff amount and a longer-lasting payment period. For example, if you owe just $1,000 on a student loan with a low 2.5% interest rate, and you make only the minimum payment, it will take you five years to pay that debt off. The average millennial uses 45% of their total income just to pay student loans.
An even bigger problem arises for the students who began college and obtained a student loan but then failed to graduate. Almost half of those who attend college (40%) do not graduate. Once they leave school, officially or unofficially, their student loan payments begin whether they graduated or not. Now they have all the handicaps of a student loan without any of the advantages.
The Six Steps
1. Set an ironclad student loan repayment date.
I am not talking about a general goal for some time in the future. I am talking about a hard-and-fast date when you will have it paid completely off. The goal will include a plan of action and a debt log. A debt log contains the total amount you owe and weekly and monthly tallies so you can see if you are meeting your projected benchmarks in your plan. See Escape Debt Prison: The Tools You Need To Escape Crippling Debt for spreadsheet and more information.
2. Pay additional money on your loan’s principal.
Just sending additional money is a mistake, as your loan provider will apply it to the interest on your loan—which is not helpful to you. Remember, student loan interest is compounded daily, and the balance grows quickly. You will need to contact the loan provider, so they understand they are to apply the extra money to the principal. You may have to do that with every additional principal payment.
If you are confused about who your loan provider is or how to contact them, try this link for assistance: https://studentaid.gov/manage-loans/repayment/servicers
3. Start a side gig to make extra money.
To make additional payments, start a side gig. The choices for side gigs include your own business, working part-time for someone else, or even reselling new or used consumer goods. In addition to helping you pay off your student loan(s), a side gig will make you more financially resilient. Here is an extensive list of side gigs in case you are not sure what you want to do: https://parade.com/976110/marynliles/side-hustle-ideas/
4. Create a budget.
To achieve your financial goal(s), you need to create a budget. A budget allows you to maximize the effectiveness of your income and your repayment plan. It also allows you to make informed decisions about what is important to you and what you can live without. For more budgeting tips, see Escape Debt Prison: The Tools You Need To Escape Crippling Debt.
5. Consider refinancing.
Normally, the standard is to consider refinancing or consolidating several loans into a single loan with a lower interest rate. Currently, however, with our environment of ever-rising interest rates, this may or may not be a good idea. Remember, loan fees really matter! Also, be very careful of scammers who claim they are from a government program but are actually a private company. Here is the link to the government’s consolidation program: https://studentaid.gov/app/launchConsolidation.action
6. Set up regular financial meetings.
You will need regularly scheduled goal review sessions. If you have a significant other with whom you cohabitate, they should be included. This will be a regular weekly review for the two of you to discuss your forward progress. You can also review and revise your various strategies to increase your performance.
These steps represent best practices of those people who have successfully escaped their own student loan debt prison. Create a plan, commit to that plan, and escape school loan debt prison.
6 Bonus Tricks to Escape Student Loan Debt Prison
You can usually get a discount on your payments, from .25% to 1%, if you set up automatic payments routed from your checking account.
Be sure to get your federal tax deductions for interest on qualified student loans.
If you happen to be employed by the government, you could be eligible for a Public Service Loan Forgiveness Program. https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service
Some companies offer student loan repayment assistance as an employee benefit. You might consider switching employers to a company that has such a program if your employer does not have this benefit.
Get a grant to help or outright repay your student loan. Here is a great place to start your research: https://www.forbes.com/advisor/student-loans/11-best-free-grants-to-pay-off-your-student-loans/
If you are single, a common and very successful trick is to move back home to your parents to save money. At the same time, you use every dime you can afford to pay down your loan(s). This is a temporary move, and it is good to give your parents an exact date of when you will be leaving. Also, as a self-governing and self-supporting adult, you will be expected to help with chores around the house. After all, your parents should get something from the deal.