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Worried About Student Loan Debt? You’re Not Alone.

Key Points
  • Put your student loans in context by realizing that they generally fall in the "good debt" category, provided that you don’t overextend yourself.

  • By coming up with—and sticking to—a reasonable loan repayment plan, you'll control the debt rather than letting it control you.

  • Explore all your options and make loan repayment a priority as you pursue your career goals.

Dear Readers,

What are the primary money worries of today's college graduates? This is a question of my own that I thought was worth answering. So I went to the source and asked my followers on social media to share their top financial concerns as they graduate and head out into the work world. It was abundantly clear that student loan debt was first and foremost for the class of 2017.

I can understand why. Getting a degree is a huge accomplishment, but for most people the cost of this achievement is pretty steep. And now, navigating the job market with a sizeable debt can seem like an overwhelming challenge. If this is your situation, a little perspective and planning will help you handle it. Here are some ideas.

Put your debt in perspective

Before you do anything, let's give your student loan debt some context. Not all debt is the same. Quite simply, debt can generally be put in two categories—good and bad. Good debt is low interest, frequently tax deductible, and taken out for a greater purpose like a mortgage or—yes—a student loan. Bad debt is high interest and used to purchase depreciating goods. In other words, it’s usually the stuff you buy with credit cards.

While your student loan debt can seem more burdensome than a smaller credit card debt, it generally falls into the good debt category because it's at a lower interest rate and, depending on your filing status and income, under current tax law you may be eligible to deduct up to $2,500 of student loan interest. On top of that, many degrees will increase your lifetime income potential.

But no matter your future opportunity, you have to create a plan to start repaying your debt now.

Make a complete list of your loans

If you have only one Federal loan, that's great. But a lot of people have some combination of Federal and private loans, with different interest rates and terms. To manage multiple loans effectively, you’ll need to know exactly what you owe.

One way to get a handle on this is to create a spreadsheet or table with columns for loan amount, interest rate, term, minimum monthly payment and any other pertinent details. This will give you a visual snapshot to refer to as you determine your repayment plan. Not sure who your loan servicers or providers are? You can find all of your Federal Loans at the National Student Loan Data System (NSLDS). Private loans and other loans not listed on NSLDS will most likely be listed on your credit report which you can access by visiting www.annualcreditreport.com.

Decide what to pay first

It is important to make on-time payments of the minimum amount required on your loans to avoid late fees, penalties, or hits to your credit score (delinquency could affect your ability to borrow money in the future for a car, a home, or even impact your ability to rent an apartment). 

And if you have extra money to put toward your loans, you'll want to structure those added payments to help minimize both the total interest you'll pay and the length of time it takes to pay off the balance. So with your loan inventory in front of you, consider this general approach:

  • Pay higher interest loans first. Einstein supposedly said the greatest force in the universe is compound interest. That's not so great when it's working against you. Focusing on higher interest loans is a reasonable defense against increasing your debt.
     
  • Make private loans a top priority. Private loans tend to have higher interest rates, or variable rates, and don't have the borrower-friendly repayment programs that many Federal loans do. If you have a private loan, it should likely take priority in your repayment plan (but before you do, check to see that you won’t get hit with a prepayment penalty).
     
  • Understand your Federal loan options. You may be able to consolidate your Federal loans to bring down your interest rate. You may also qualify for Income-Driven Repayment, which caps monthly payments at a percentage of discretionary income. Many nurses, teachers and other public service fields currently qualify for Federal loan forgiveness after a certain period of time. Get the facts. The Repayment Estimator on Studentloans.gov is a good place to start.

Make student loan payments a priority

Prioritize your student loan payments in your mind—and in your budget. If you make it a line item in your monthly expenditures and stick with it, repayment will seem easier, and you'll reach your goal faster.  

For example, things you could consider include:

1. Changing the date.  Check with the loan servicer to change the payment due date to coincide with your paycheck.

2. Making it automatic. If you sign up for electronic payments, you may be able to lower your interest rate.  For example, Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans offer a 0.25% interest rate deduction for automatic payments.

Whatever your circumstance, sensible debt management is part of good money management. Sure, having no debt would be the ideal, but that's pretty uncommon in today's world. So plan, follow through—and take control.

Debt for education can pay you in the long run

At the moment, you may have some loans to pay back instead of money to invest, but you also have one of the major tools for finding a good job. You've probably heard that higher education corresponds to higher income. The good news is it's true. According to a report by The Hamilton Project, in 2016, the median weekly earnings of a person with a Bachelor's Degree was 40 percent greater than a person with only a high school diploma. And looking at cumulative earnings over an entire career, the typical bachelor’s degree graduate worker earns $1.19 million, which is twice what the typical high school graduate earns.

In other words, you're already ahead of the game. Be confident. You did the work so now use your direction and determination to go out into the workforce and make your education pay. Congratulations to the class of 2017!

Have a personal finance question? Email us at   askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries,  contact Schwab.

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Important Disclosures

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The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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