October comes with ghouls and goblins, but not much is scarier than student loan debt! October also marks six months after graduation for many young adults, and that means it’s time to face their student loans. Figuring out how to manage student loan payments as well as leading a financially responsible life and contributing to savings and retirement funds can be confusing, challenging and even scary. We’re here to take some of the fear and confusion out of the equation by working one-on-one with our young clients to get through it together.
First, it’s important to know your options. There are three things we typically talk about with clients when it comes to student loans. Deferment, consolidation and federal student loan forgiveness. The latter is a bit more uncommon for recent grads to obtain so we tend to focus on deferment and consolidation.
When you choose to defer you can delay your payments for months and sometimes even years. You’ll have to pay the interest, but it’s a much lower cost than those full monthly payments could be. Delaying payments gives you the time necessary to pay off other debt you might have. Most recent grads have begun working at their first full-time job with a new paycheck and may have splurged on a cool apartment, a new car, store credit cards etc. Even if it’s just putting a couple thousand dollars toward credit card debt, paying off these debts while deferring loan payments can help you get situated financially so you can start putting money into your savings or 401(k).
Of course you don’t want to defer forever, but even a year could provide you the time to get a budget together and figure out how much a monthly payment will be and start putting it aside in a savings account. The best way to start saving for retirement is to begin contributing to an employer sponsored 401(k). Since you don’t HAVE to make student loan payments right away, you have the wiggle room to experiment with how your cash flow will work and how to live with a small percentage of your pay check being deducted each month and plan accordingly.
Consolidation may make sense when young adults can work with banks that offer low interest rates to combine their loans. You have to be careful when consolidating because the bank will charge an interest rate that is the average of all loans. If you have some loans that come with high interest rates, this may not be the best option for you. When you’re able to consolidate you’ll only have one payment each month, only one check to write, which allows you to better budget and create a plan that works with your monthly cash flow.
Another recommendation we like to discuss with some clients is the importance of making at least a minimum payment on all debts as well as attacking the low hanging fruit. Low hanging fruit are things like credit cards with extremely high rates, store credit cards with small debts, car payments, etc. We suggest using extra funds obtained through a holiday bonus or a promotion to address low hanging fruit. Even small balances can affect your credit score. By using extra funds to eliminate some of these smaller debts, you can increase your credit health and allow yourself to better budget for those monthly payments on student loans as well as contributions to retirement savings.
In closing I think the biggest takeaways should be to always make sure you’re making at least the minimum payment on any debts and look to tackle the highest interest rates first. As always please feel free to contact an advisor for guidance and any questions you may have.