As college graduates prepare to march on stage to accept their diplomas, they also have to prepare to march off with thousands of dollars in student loan debt. In fact, the Class of 2014 is the most indebted ever, with 60 percent of its graduates owing money to federal and private loan providers.
According to the Federal Reserve of New York, the total student debt in the United States is now a staggering $1.2 trillion, with the average graduate owing nearly $33,000.
As troubling as that news is, recent graduates need not be discouraged. Here are a few tips to help you become free of student debt.
Develop a 3 to 5-year repayment plant
Make a goal to pay off your debt by creating a three to five year plan. Knowing exactly when and how much you need to pay per month will not only keep you motivated, but will also help you commit to your goal of being debt-free.
Tackle your student debt like it's a mortgage
To quickly reduce the principal of your loan, treat it like you would a mortgage: by making larger monthly payments.
For example, a $30,000 loan with an interest rate of 6.8% and a payback period of 10 years would cost $345 a month. If borrowers add just an extra $100 to their monthly payments, they would reduce the life of their loan by 2.8 years and save over $3,500 in interest.
There is also the option of making bi-weekly payments instead of jet monthly ones. With this type of payment plan, you pay half of your monthly payments every two weeks. This means that you pay less in interest because there is less time for interest to accumulate between payments. It also means that you pay an equivalent of 13 monthly payments every year, which will help you repay your loan faster.
Categorize student loans based on interest
If you took out more than one student loan, put them in order from the one with the highest interest rate to the lowest. The plan is to pay off the loans in that order, therefore saving you money in interest over the life of your loans.
Establish a student loan repayment fund
Save an additional $100 (or whatever amount you can afford) a month by directly depositing it into a separate savings account using automatic savings. having automatic deposits will force you to stockpile some money, which would otherwise be spent on impulse purchases.
Let the money grow and develop into a lump sum to pay off the remaining balance of your loan.
Take advantage of student loan interest tax deductions
Get some extra money in your pocket by deducting the interest you pay on a qualified student loan. It is claimed as an adjustment to your income, so it does not need to be itemized. According to the Internal Revenue Service, "the amount you may deduct is the lesser of $2,500 or the amount of interest you actually paid."
Delay instant gratification
It is easy to lose sight of your goals when there is a need for "instant gratification". However, it is important to plan ahead and focus on your future financial goals. This means making sacrifices like putting off purchasing a new car or renting a studio apartment instead of that expensive one-bedroom with a view.
Maintaining your financial discipline is key to reducing your college debts. Remember to limit your spending and live within your means. It may seem like big sacrifices today, but it will certainly pay off in the future.