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Should You Pay Off Student Loans Immediately or Over Time?

June 12, 2019

When you start your post-college career, you may be tempted to breathe a sigh of relief. Before you do that, you have important decisions to make. You’ll have to stretch your paycheck to cover your new lifestyle and associated expenses: a furnished home or apartment, vehicle, insurance, and hopefully a 401K contribution. If you are like 70% of college graduates, you also have student loans that need to be repaid.

 

In most situations, it’s going to be most beneficial to pay off your loans as quickly as possible so that you are paying less towards interest. The average college graduate’s starting salary, however often cannot allow for enough additional income to cover more than the regularly scheduled student loan payments.  Most student loans have a six-month grace period so you can do some budgeting and planning first – if you need to. We don’t suggest using the grace period unless you find it necessary to organize your finances. During a deferment such as a grace period, the interest could still be accruing depending on the type of loan that you have.

 

If you determine that you may be better off establishing sound financial footing and a workable monthly budget before you begin repaying those daunting loans. Keep these tips in mind as you formulate a strategy for debt payoff.

 

Student Loans Have Advantages

Varying types of debt are governed by different laws and regulations. Banks often base interest rates for consumer credit loans on your established credit rating. Interest rates for auto loans or credit card debt tend to be higher than a mortgage or student loan interest. As you review your debt load and make a plan, remember: student loan debt comes with a few “advantages” that other types of debt don’t offer.

 

  • Preferential tax treatment: With a new job, you will be paying taxes on your income. Student loan interest is deductible up to $2,500 and can be deducted from pre-tax income.
  • Lower interest rates & perks: Federal student loans have lower interest rates and are sometimes subsidized by the government.
  • Lender incentives: Private student loans may come with incentives from the lender that make them a better deal than other credit types. These include fee waivers, lower interest rates, and deferment options.
  • Flexible payment plans: Options for lower payments and longer terms are available for both federal and private student debt.
  • Build your credit score: You can build your credit score with student loan debt. Now, depending on whether you’re making on-time payments or not, you could negatively or positively affect your credit. If you chose to make small payments during deferments, or a grace period, and regular on-time payments you will be more likely to establish a favorable credit record and reduce the amount of interest you pay overall.

 

Programs to Help You With Student Loan Payments

There are few options for loan forgiveness with regular debt, but student loans offer opportunities to reduce or eliminate your debt. These may come with commitments and tax implications, so be sure you fully understand them if you decide to take advantage of these programs.

 

  • Loan forgiveness: Federal student loans may be forgiven, but you’ll want to be sure that you’re following all of the requirements needed of the program. Be sure before choosing this option that the federal loans you have qualify for the program. Also, keep in mind there could be taxes due on the amount that is forgiven. Some student loan forgiveness programs include PAYE (Pay as You Earn) and REPAYE (Revised Pay as You Earn), Public Service Loan Forgiveness, and Teacher Loan Forgiveness.
  • Loan Consolidation: Multiple student loans can be consolidated into one payment with the interest rate determined by a weighted average of your current loans – interest rates. Combining multiple loans may be easier to manage on a modest starting salary. Consolidating federal loans usually doesn’t require a good credit score, either.
  • Refinance, and you could achieve a lower interest rate: Lenders like Education Loan Finance specialize in student loan refinancing, and have options like variable interest rates and flexible terms. Refinancing your debt could make student loan debt easier to manage than other types of credit.

 

Pay Off High-Interest Debt First

Before you decide to pay off your student loans, think about the financial obligations you’ll be taking on. Instead of carrying a credit card balance or making low payments for an auto loan, it makes sense to continue your low student loan payments and pay off more expensive debt first or debt with a higher interest rate. In the long run, you’ll save money and build your credit score.

 

If you still have doubts about not paying off student debt first, consult a professional financial advisor for help prioritizing your goals and setting up a budget that lets you achieve them.

 

Click Here to Learn More About Student Loan Repayment

 

 

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2019-12-11
Holiday Budgeting: Gift Ideas That Last Into the New Year

Unless you’re one of those people who had their holiday shopping done by December 1, you’re like the rest of us who spend 25 days scrambling around, balancing holiday parties, school finals, baking cookies, traveling, and shopping for gifts. Gift-giving is one of most festive-feeling and most stressful of holiday traditions. It’s also likely what brought you to this blog. As a recent college graduate, with an entry-level paycheck and mountain of student loan debt, it’s difficult to gift well without destroying your monthly budget. Check out our list of possible presents that are money-conscious and aren’t likely to get returned (or thrown out with the wrapping paper).

 

Give Experiences

It’s no secret the U.S. is a country of “stuff.” We fill our homes, garages, and eventually, storage units with items that we just know we’ll use again someday. While the newest iPhone® or New York Times® Bestseller might make your family and friend’s faces light up this December, once the next model comes out or the last page is read, those gifts become obsolete. 

 

 So instead of blowing your hard-earned income and monthly budget on more “stuff,” consider giving experiences: concert tickets, zoo memberships, or woodworking classes that your recipient will remember longer than they will the plot of that over-rated biopic. What’s even better: you can experience these things together. If you’re looking for more experiences to gift this holiday season, check out Huffington Post’s article, 21 Gift Ideas For People Who Value Experiences More Than Things. You can find a more holistic approach to experiential gift-giving for the mind, body, and soul in this ELFI blog.

 

Give Savings 

While not the most glamorous gift, receiving a contribution towards your student loan debt really is the gift that keeps on giving. Helping put a dent in student loan debt is more thoughtful than cash or a gift card snagged while checking out at the grocery store, and it can help you pay off those student loans faster. 

 

If your parents, grandparents or significant other made a student loan payment in your honor for the next two-three years for the holidays and your birthday, thousands of dollars could be shaved off of your student loans. Getting out from under student loan debt faster also means more fun money in your checking account to boost that monthly budget and buy the gifts you really want to give. 

 

If you’re like the many students who took out multiple federal and private student loans over the course of college, it may be a good time to consolidate and refinance student loans into one singular loan. Besides possibly scoring a better repayment term and interest rate, seeing the family contributions to paying off the debt could really jumpstart your 2020 goal of getting more financially fit. 

 

REgive Gifts

Re-gifting gets a bad wrap for being the lazy person’s way of shedding the unwanted junk in their house. However, with a little extra thought, re-gifting can be a fulfilling experience. Look past the junky toaster on your kitchen counter or clothes you hate and consider items that are in good condition, but no longer bring you joy or serve a purpose in your home. Maybe it’s an old CD that you and your dad listened to before you left for college. Maybe it’s an Instant Pot® that you really thought you’d use more of in 2017. Or maybe it’s a necklace your friend always compliments. Whatever it is, clean them up, wrap them nicely, and—whatever you do—be sure your friend or family member didn’t give you the item first. The secret to successfully re-gifting is to be upfront and honest about the gift being from your own personal department store and share why you did it.

 

Give Time

The holiday spirit is all about being with the ones you love and being generous to those in need. If you or your family are feeling stressed to maintain monthly budgets this year, consider scrapping gifting (in the traditional sense) altogether. There are countless organizations that take volunteers throughout the holiday season to distribute presents in hospitals, cook meals for the homeless, and even shovel snow or hang Christmas lights for the elderly. By giving time, you make connections in your community, spread cheer, and build karma for the new year. 

 

If you’re still feeling stressed about ruining your perfectly planned monthly budget this holiday season, consider student loan refinancing. Recent graduates have reported saving an average of $309 every month after their student loan refinance with ELFI*, which averages out to $20,936 in total savings.¹ And because this is the busy time of year, you can see your potential savings and see if you are prequalified for a student loan refinance in minutes. Happiest of holidays to you and yours!

 
 

*Subject to credit approval. Terms and conditions apply.

 

¹Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2019-12-10
Student Loan Repayment: Debt Snowball vs. Debt Avalanche

By Kat Tretina

Kat Tretina is a freelance writer based in Orlando, Florida. Her work has been featured in publications like The Huffington Post, Entrepreneur, and more. She is focused on helping people pay down their debt and boost their income.

 

To cope with the high cost of college, you likely took out several different student loans. According to Saving For College, the average 2019 graduate left school with eight to 12 different student loans.

 

With so much debt and so many different individual loans, you may be overwhelmed and can’t decide where to start with your repayment. If you want to pay off your loans ahead of schedule, there are two main strategies that financial experts recommend: the debt avalanche and the debt snowball.

 

Here’s how each of these strategies work and how to decide which approach is right for you.

 

The difference between the debt snowball and debt avalanche strategies

Both the debt avalanche and debt snowball methods are strategies for paying off your debt early. However, how they work is quite different.

 

Debt avalanche

With the debt avalanche method, you list all of your student loans from the one with the highest interest rate to the one with the lowest interest rate. You continue making the minimum payments on all of your loans. However, you put any extra money you have toward the loan with the highest interest rate.

 

Under the debt avalanche, you keep making extra payments toward the debt with the highest interest rate. Once that loan is paid off, you roll over that loan’s monthly payment and pay it toward the loan with the next highest interest rate.

 

For example, let’s say you had the following loans:

  • $10,000 Private student loan at 7% interest
  • $15,000 Private student loan at 6.5% interest
  • $5,000 Direct Loan at 4.45% interest
 

In this scenario, you would make extra payments toward the private student loan at 7% interest first with the debt avalanche method. Once that loan was paid off, you’d make extra payments toward the private student loan at 6.5% interest, and then finally you’d tackle the Unsubsidized Direct Loan.

 

Debt snowball

The debt snowball method is more focused on quick wins. With this approach, you list all of your student loans according to their balance, rather than their interest rate. You continue making the minimum payments on all of them, but you put extra money toward the loan with the smallest balance first.

 

Once the smallest loan is paid off, you roll your payment toward the loan with the next lowest balance. You continue this process until all of your debt is paid off.

 

If you had the same loans as in the above example and followed the debt snowball method, you’d pay off the Direct Loan with the $5,000 balance first since it’s the smallest loan. Once that loan was paid off, you’d make extra payments toward the $10,000 private loan, and then you’d pay off the $15,000 private loan.

 

Pros and cons of the debt avalanche method

The debt avalanche strategy has several benefits and drawbacks:

 

Pros

  • You save more in interest: By tackling the highest-interest debt first, you’ll save more money in interest charges over the length of your loan. Compared to the debt snowball method, using the debt avalanche method can help you save hundreds or even thousands of dollars.
  • You’ll pay off the loans faster: Because you’re addressing the highest-interest debt first, there’s less time for interest to accrue on the loan. With less interest building, you can pay off your loans much earlier.
 

Cons

  • You don’t see results as quickly: Because you’re tackling the debt with the highest interest rate rather than the smallest balance, it can take longer before you can pay off a loan.
  • You may lose focus: It takes longer to pay off each loan, so it’s easier to lose motivation.
 

Pros and cons of the debt snowball method

The debt snowball method has the following pros and cons:

 

Pros

  • You get results quickly: Since you’re targeting the loan with the lowest balance first, you’ll pay off individual loans quicker than you would with the debt avalanche method.
  • Frees up money to pay down the next loan: You’ll be able to pay off loans quickly and roll the payments toward the next loan, helping you stay focused on your goals.
 

Cons

  • You’ll pay more in interest fees: By paying extra toward the loan with the smallest balance rather than the highest interest rate, you’ll pay more in interest fees than you would if you followed the debt avalanche method.
  • It could take longer to pay off your debt: Because you aren’t targeting the loans with the highest interest rate first, more interest can accrue over the length of the loan. The added interest means it will take longer to pay off your loans.
 

Which strategy is best for paying off student loans?

So which strategy is best for paying off student loans: the debt avalanche or the debt snowball? If your goal is to save as much money as possible and pay off your loans as quickly as you can, the debt avalanche method makes the most financial sense.

 

Psychologically, the debt snowball may have the advantage. According to a study from the Harvard Business Review, the debt snowball method is the most effective approach over the long-term, as borrowers are more likely to stick to their repayment strategy. However, which strategy is best for you is dependent on your mindset, motivation level, and your determination to pay off your debt.

 

Managing your student loan debt

Regardless of which repayment strategy you choose, you could save even more money or pay off your loans earlier by refinancing your student loans. When you refinance student loans, you apply for a loan from a private lender for the amount of your current student loans, including both private and federal loans.

 

The new loan has completely different repayment terms than your old ones, including interest rate, repayment term, and monthly payment. Even better, you’ll only have one student loan with one monthly payment to remember.

 

Use ELFI’s Find My Rate tool to get a rate quote without affecting your credit score.*

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2019-12-09
This Week in Student Loans: December 9

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:

Department of Education Proposes That New Entity Handle Student Loan Debt

On Tuesday of this week, the Trump administration and Department of Education (DOE) Secretary Betsy DeVos proposed that a new, independent entity manage the federal student loan portfolio, rather than the Department of Education’s Office of Federal Student Aid. Devos proposed the move at a conference this week, calling for a “stand-alone government corporation, run by a professional, expert and apolitical board of governors.”

 

When asked why they believe the federal student loan portfolio should be managed outside of the DOE, Devos claimed that the DOE was never set up by Congress to be a bank, but claims that’s effectively what they are.

 

In order to make this happen, laws would have to be passed that would separate the Office of Federal Student Aid from the DOE in order for it to be a stand-alone entity.

 

Source: Yahoo News

 

Lawmakers Call for Investigation of Federal Loan Discharge Program for Disabled Borrowers

With plenty of heat surrounding allegations against the U.S. government’s Public Service Loan Forgiveness Program for not making the qualification requirements clear, a new federal program is under fire from lawmakers this week – this one meant to forgive student loans of borrowers with “significant, permanent disabilities.” An NPR report recently revealed that the program wasn’t helping a large portion of borrowers who were eligible.

 

This loan discharge program is specifically meant to help individuals who have the most severe type of disability: Medical Improvement Not Expected (MINE). The Education Department finds eligible borrowers by comparing federal student loan records with the Social Security Administration records, then sends a letter to these disabled individuals and requires them to apply in order to have their loans discharged. The controversy lies in that that many of these borrowers are unable to apply or may not be aware of the notice they received. The NPR report revealed that only 36% of eligible borrowers have had their student loans discharged.

 

Source: NPR

 

Trump Calls on Aides for Plan to Tackle Student Debt

With Democrats such as Elizabeth Warren making bold claims for tackling student debt in the US, President Trump has called on his administration to put together a “blueprint” for how they will manage the student debt crisis. The Washington Post claims that Trump is calling for this plan as a method to combat “anxieties that Democrats such as Warren will tap into populist impulses that propelled his 2016 victory,” and that “he will need policies beyond his signature areas of immigration and trade to counter them.”

 

Source: The Washington Post

 

Rand Paul Wants You to Use Your 401k to Pay Off Student Loans

Senator Rand Paul (R-KY) recently proposed a legislative act that would allow individuals to use pre-tax money from their 401k to pay off student loans, or even pay for college. The HELPER Act (Higher Education Loan Payment and Enhanced Retirement), is an initiative by Paul to “reshape the way people save for higher education, driven through tax and savings incentives,” says Forbes writer Zack Friedman.

 

Key takeaways from the act would include the ability to withdraw $5,250 from your 401(k) or IRA annually to pay off debt or pay for college, the ability to pay tuition and expenses for a dependent or spouse, tax-free employer-sponsored student loan and tuition plans, and a removal of the cap on student loan interest reduction.

 

Source: Forbes

 
 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.