Reassess Student Loan Debt to Reach Your Financial Goals Faster
Buying your first home, saving for retirement or even building an emergency fund can be intimidating for any of us. Add the need to pay down student debt and you may find yourself worried about the best approach. But it doesn’t have to be this way. There are some simple steps you can take to reassess your student loan and make sure you’re on the right track to reach your financial goals that much sooner.
Do Your Research
First and foremost, make sure you know the specifics of your current student loan. If you sign up for your loan and never review your options, you may be leaving money on the table.
What type of loan do you have – amortizing, deferred, interest-only or federal? Are there any penalties involved? What is your current rate? Monthly payment? Armed with this information, make a point to continually re-evaluate your loan options and ways to save. It’s also important to keep an eye on legislation that may impact your loan.
Fortunately, there are numerous research tools at your fingertips. Once you know everything about your current loan, you can compare rates, monthly payments, loan types, terms and more online. You can also reach out to a loan consultant at any time to ask for their expertise to shorten your loan and/or lower your monthly payment.
If you’ve graduated and don’t already have a principal and interest amortizing loan, you’ll likely want to switch. With an amortizing loan, you pay a set amount each month so your monthly bill will never be higher than expected. Plus, if you have room in your budget, you can make extra principal payments to shorten the length of your loan and save interest over the life of the loan.
Focus on Your Credit
Whether you decide to refinance your student loan or you’re focused on reaching another financial goal like buying your first home, credit is always key. Paying on time and managing your revolving debt make up two-thirds of your FICO score, so focus on these first.
The good news is student loans are not considered bad debt; and if you pay them on time, they can even improve your credit score. If you haven’t been paying on time – start now. Then after six months to a year of proper payments, check where your credit stands.
You will also want to keep an eye on your revolving debt and debt-to-income ratio. Try to keep your revolving debt (the amount you have charged and don’t pay off) at 30% or less each month. For your debt-to-income ratio, less than 36% is ideal. This ratio helps guarantee you don’t overextend your monthly budget by looking at your mortgage/rent costs and debt payments (all loans and credit card payments) against your income. If you watch these three items closely, your credit score will climb ensuring the best rates and loan offers available long into the future.
Commit Your Monthly Savings to Reach Your Financial Goals
When you examine your student loan, it can be a good time to take a holistic approach and evaluate your entire budget for other opportunities to save.
For example, if you haven’t been able to pay down credit card debt, you may want to consolidate your debt into a personal loan. By moving to a personal loan you’ll enjoy a lower interest rate and only have to manage a single payment instead of multiple payments. A personal loan can also be a good alternative if you struggle to save money for large expenses like home renovations or unexpected costs like vehicle maintenance.
You may even find opportunities to cut items from your budget entirely like eating out or canceling your cable bill. As you find these savings, you can start to move toward your next financial goal. If you’re looking to buy a home, meet with a loan consultant to learn the loan process and understand how much home you can afford. If you’re looking to save, meet with a financial adviser to evaluate your retirement, investment and savings accounts.
If you don’t have an urgent need, consider putting the extra funds toward your loan principal to pay off student debt that much faster.
*All loans subject to credit approval by Greater Nevada Credit Union.