Most people get into student debt with the hope of a better job due to the degree they receive.
However, not all graduates are lucky in finding well-paid jobs. Even if they get employed, the accumulated debt might not allow them to manage personal finances effectively.
Unfortunately, personal finance management is not taught in your course program. The real challenge is not getting a degree; it starts when the expenses exceed the income level, and you need to do something not to default.
Currently, more than 44 million people in the U.S deal with student loan payments every month. Considering the problem’s vast scope, this guide will present some tips on managing personal finance when repaying student loans.
Keep in mind that the general rule for effective personal finance with student loans is that you have to fully grasp your current financial standing and know your debt management options. These options can be forgiveness programs, repayment plans, etc.
1. Expenditure Analysis
When talking about personal finance, many people directly think about budgeting. However, before diving into planning the budget, one should understand its two critical elements, expenses, and income.
Expenses can be various; some are crucial for survival, such as rent, utility, or food. Other expenses are not necessary, but they enhance living standards. Examples of such expenditures can be eating-out costs, theatre visits, etc. We can categorize student loan payments as necessary expenses because non-payment should not be an option.
The problem with expenses is that most people do not know how much they spend for a month. They might have an idea about the huge expenses, like rent, but usually do not track their grocery spending. When managing personal finance while having a student loan payment, it has the utmost importance to have a full view of the costs.
2. Income Analysis
One can get income in several ways, whether it is a full-time paid job or a freelance job. Although people lack a complete understanding of their expenses, they are mostly fully aware of their income level. The idea is that they should compare the expense level with the income generated to make budgeting plans.
If the balance is negative after subtracting your costs from the income, it is a bad sign. It means your income does not cover all the expenses, and you end up taking more debt through credit cards or in any alternative way.
In this case, you can either increase the income or decrease the spending. For instance, you can get an additional part-time job or eliminate unnecessary costs, like-new clothing shopping, or fancy restaurant visits.
If the balance is positive, you can start thinking about dealing with the left funds at the end of the month. You might use these funds to down-pay the student loan or save for critical days. It is up to your discretion to decide the use of these funds.
3. Keep Track of the Finances
Once you have a full grasp of the current financial standing, you need to continue this awareness process. It means you should continue analyzing your balance and keeping a good track of your progress. Sure, one can do it manually or automatize this process.
For example, you can create an Excel Spreadsheet to monitor expenses and make sure you do not exceed the planned amount. In this way, you will also know how you should spend your money till the next salary date. Additionally, one can find specific mobile applications for this purpose. Try to check your budget after each spending and decide if you are on, ahead, or behind the monthly plan.
4. Create Emergency Funds
It is necessary to save money for emergencies. Sure, for people with student loans, there is not much saving left at the end of the month. However, even if it is a small amount, you can save the funds for several months. Emergency funds will be handy if all of a sudden, you lose your job or unexpected expenditures occur, such as medical emergencies.
5. Manage Your Debt
As mentioned, student loan payments can be seen as a critical expenditure that you cannot avoid. However, if your balance is negative, you might be obliged to decrease some expenses. Debt expenses can also be decreased in several ways.
One of the best ways to get lower monthly payments can be by consolidating the student loans. Though this process can prolong the repayment process, you will end up paying less per month. Hence, your expense level will fall.
You also have the option to refinance your student loan. Maybe your parents hold the loan now and plan to transfer it into your name now that you’ve graduated. You can also refinance a parent plus loan into your name, getting you the lowest interest rate, and enabling you to pay the loan off quicker.
Another method can be through Income-driven Repayment plans. These plans allow borrowers to make payments based on their income level. Therefore, people with low discretionary incomes will pay less.
6. Contact the Creditors
If there is no option for you to manage debt payments through personal finance, you need to take swift action. Defaulting your debt will bring bigger problems. Hence, it is essential to stop the process immediately.
If you have a personal loan, you can contact the lender and explain the situation. Usually, lenders can guide borrowers facing financial difficulties. However, some lenders might avoid doing favors to the debtor. In this case, refinancing the debt with better rates can be a solution.
For federal loan borrowers, more options are accessible in times of financial trouble. You can contact the loan servicer and ask for help if you face challenges in personal finances.
Some loan servicers like Navient loans provide deferment periods due to economic hardship. During deferment, one is not obliged to make payments. You can also search the debt repayment options- such as discharge or forgiveness programs, repayment plans, etc.
7. Avoid Unnecessary Expenses
This tip can be a straightforward idea. However, many people ignore its effectiveness of it. If your balance is negative, or you want to save some funds for an emergency, you should eliminate unnecessary expenses.
For example, if you are a big fan of Starbucks, you can stop buying or at least decrease the frequency of purchase. For a short time, such a decrease can seem trivial. However, eliminating even a $10 purchase for a week will result in a $520 saving for your yearly balance.
Besides, you can start finding cheaper alternatives for your purchases. Thrift stores over high-end mass-market clothing or yoga from Youtube over gym membership can save you a considerable amount. Keep in mind that as long as you have a student loan, every penny of your income is valuable. Hence, you need to ensure you spend the income on the most needed expenditures.
8. Pay Debt on Time
On-time payment is essential for student loan borrowers. First, if you miss the payment due date, you will face late fees and other penalties. Late payments can also affect the credit score negatively. It means, in the future, you might get higher interest rates for new loans.
Besides, this approach can save some money on your personal finance. For example, some lenders provide discounts for on-time, automatic payments at small rates, such as 0.25%. Some people have multiple loans, and it can become difficult to keep track of all the due dates.
In this case, you can set alerts for payment notifications or use automatic payment features. This feature ensures the monthly due amount is deducted from the bank account straight away, on the due date, without further action from the borrower. Alternatively, you can consolidate the debt to have a single payment per month.