College Graduates: Student Loan Debt Management 101
If the real world has you feeling pressured to make ends meet, you're not alone. Today's college graduates leave school with an average student loan debt of $30,000, plus an average $3,000 in credit card debt and nearly $30,000 of student debt. While there are student loan debt forgiveness programs, those are hard to come by and are becoming even more so. So learning how to manage that student loan debt and eventually break free of that burden is a skill you'll need to develop as a newly minted college grad navigating the world of adult finances.
The basics of managing student loan debt
Student loan and credit card payment requirements can be overwhelming, particularly on an entry-level salary. But if you've learned sociology, English lit and biology, you can learn to manage student loan debt. To get started in the right direction, let's start with the principles of long-term debt management and how debt consolidation relates to those principles.
There are three basic principles of student loan debt management. They are:
- Making regular principal payments
Let's look at them one by one.
In the process of creating a budget, you may realize that your paycheck doesn't adequately cover your expenses. This type of cash flow problem must be resolved quickly, or you'll end up with bad credit.
In making a budget, one of the first things you need to do is be realistic about how much you're going to need for certain expenses. You might assume you can live on ramen noodles several nights a week, but in reality you'll likely find that won't work for long. So you end up spending more than you planned on carryout or extra groceries.
You also need to anticipate occasional large expenses. Do you own a car? Figure on spending several hundred dollars once or twice a year on repairs and upkeep, more if it's a high-mileage vehicle. Need to buy one? Figure on a couple hundred dollars a month for a used car loan. Are you going to be traveling, taking a vacation now and then? You need to plan for those costs as part of your monthly budget. Christmas shopping? Ditto.
Being realistic also means taking care of yourself. Sure, you can live very cheaply if you live like a monk, but how long can most of us go on like that? Budget for your special treats, rewards or entertainments so that when you enjoy them, you can do so without feeling guilty that you're breaking your budget. Depriving yourself may work for awhile, but too often eventually leads to budget-breaking indulgences when you finally give in to temptation.
Don't expect to get your budget perfect right off the bat. You develop a budget, you don't just sit down and write one. And that takes time. With experience, you'll find what are realistic targets for your various expenditures and learn what can be trimmed and what must be expanded. The only hard figure is your income, and that can't be ignored. Everything else can be reshuffled and adjusted under that cap.
Making regular principal payments
The key to getting debt under control is paying down the principal on the debts you owe. That means you not only have to make regular debt payments, you also want to avoid incurring new debt that simply drives your principle back up again.
Interest charges are the enemy of principal reduction. The more you're paying in interest, the less you have available to pay down loan principle. So your first goal should be to minimize or eliminate any high-interest debt.
Credit cards often carry the highest interest rates of any consumer debt. So it's a good idea to pay those off first. You can also avoid interest charges completely by paying off your credit card balance in full each month. Just don't let a zero balance tempt you into racking up a fresh set of bills next month, or you won't have anything to pay toward your other debts.
Debt consolidation can alleviate the cash flow problem and make regular principal payments affordable (the first two tenets of debt management noted above). A debt consolidation loan rolls your student loans and unsecured credit card debt into one longer term, fixed-interest credit loan. There are also debt consolidation programs designed solely for student consolidation debt; these combine your student loans, but not your credit card debt. In either case, an effective debt consolidation program results in a lower monthly payment and fixed pay-off schedule.
Once you have a workable budget that includes amounts for regular principal payments, you can determine what's left for the last tenet, saving. Saving is important because often, the unexpected happens, and sometimes it can be costly. Without a safety net of savings, unbudgeted expenses can quickly undermine your debt management efforts.
Saving is also an important habit to develop early on, in preparation for life. Many young people defer saving for retirement, because they can't put aside that much and figure they can catch up when they start making real money in 10 years or so. They ignore the fact that compounding means even a little bit of money can grow to a lot over 40 years. And too often, the "real" money doesn't start coming in on schedule - so they find themselves 20, even 30 years out of college with no real retirement savings.
Savings also enable you to build a fund to meet your goals, such as buying a house, starting a business, or having a family. Setting some money aside on a regular basis is the first step toward meeting those goals and having a successful life, even though you may not have figured out exactly where you're headed yet.
Unfortunately, there's no turning back the clock to the carefree college life. But with the right strategy, a carefree future is a real possibility. Now that's something to drink to.
(Updated July 2016)