5 Ways to Tackle Debt While Federal Student Loans Are Deferred
Federal student loans have been deferred since March 2020. That is two full years of your loans not accumulating interest. If you haven’t been tackling your debt head on, now is the time. As jobs are restored and payments continue to be deferred, you’ll be able to make the dent in your debt that could change your life. Here are 5 ways you can reduce your debt.
Continue Making Payments
Payments on federal student loans were initially paused as we were facing the pandemic head on and millions of Americans lost their jobs (or were seeing a reduction in hours). Now that employment is up, you should really look at your finances to determine if you can afford to start making your monthly payments again, even if they aren’t required.
By making payments, you are putting more of your money at work since your loan isn’t accruing interest each month. Your entire payment will be going towards the balance, making it easier than ever to pay off that loan.
If you can’t afford to make the entire payment, assess how much you can afford. It’s easier to start adjusting to what life looks like with that new expense before it’s actually required to allow yourself some room as you are testing your payment affordability options.
Pay More Than Your Minimum
Really ask yourself, can I afford more than the minimum payment or do I just not want to? If you are barely scraping by, without excessive spending in areas like restaurants, clothing or vacations, then maybe the minimum payment is all you can do right now. Be ok with that! As you have time, start to look at how you can increase your income.
If you can afford to pay extra, how much extra are you able to pay each month? This will be determined by your existing income and expenses but a budget can help you answer that question. I like to use this Debt Reduction Calculator spreadsheet from Vertex 42 to see when you can be debt free, allowing you to play with different monthly payment scenarios. This might be the exact tool you need to get motivated to pay extra on your debt.
Focus on High Interest Debt
If you have debt with higher interest rates than your current federal student loans, you may want to think about tackling that debt first, utilizing the avalanche method. Use the calculator above to assess your options. Using money earmarked for your student loan payment to pay extra on another debt will allow you to reduce the principal on the high interest debt, allowing you to pay less interest over time.
This will only be your strategy during the deferment period but if history repeats itself, extensions of this grace period will continue to happen.
Adjust Your Budget
Whether you are struggling to make a payment or trying to calculate how much you can afford to pay towards your debt, a budget can be a helpful tool to answer all your questions. The 90-Day Expense Tracker in this free Ditch Debt Bundle will help you to figure out where the heck your money has been going. From there, you can decide if you need to tighten the belt in areas of excessive spending or eliminate spending in areas of habit or convenience.
Remember, following a plan to pay off debt can be as aggressive as you want and it doesn’t last forever. I followed an intentional semi-aggressive plan to become debt free and while 20 months seemed to last forever, it still included vacations, happy hours, weekend festivals and home repairs. Paying off debt can happen in tandem to enjoying life.
Increase Your Income
At the end of the day, sometimes we just have to increase our income. Take a look at your free time and decide if a side job is necessary to tackle debt. This doesn’t mean working every weekend at a job that pays barely above minimum wage. Get creative and truly work smarter, not harder. Utilize your hobbies, skills, certifications, previous experience and network to find work that will pay you what you’re worth.
Once you have additional income coming in, don’t waste it. Make a plan to use that money to pay off debt, save for a large expense or increase your emergency fund.
While working with clients to become debt free, the problem I often see isn’t that they don’t make enough money. It’s that they don’t have a plan for their money and they don’t give every dollar a job.
If You Have Federal Student Loans, What's Your Plan?
May I extend my fullest congratulations to those with Federal student loans. You are granted, yet again, an extension to when your payments will resume.
Now let me put my overbearing mother-figure hat on and ask you, “what are you doing about it?” How are you improving your finances with this never-been-done-before miracle that has come out of a horrible time for our world?
These COVID relief measures mean much more than simply not having to make your payment. The bigger piece is that you are not accruing any more interest. Compound interest can be a wonderful thing when you are earning it, but it has the opposite effect when you owe it on a debt.
What happens if you continue to make your payments when they aren’t required? This breaks down to a $393 student loan payment (the national average) going directly to pay off the balance of the loan.
Normally a part of that $393 payment goes towards the principal balance and another part goes towards new interest that has accrued since your last payment. Your payment has less of an impact when you are also paying on interest, taking longer to pay off your loan.
Now I ask you again, what will you be doing with this newly awarded time? Are you paying off high interest debt? Are you using it to increase the amount saved in your emergency fund? Are you doing the work to get on a working budget while you have some wiggle room?
If you didn’t say yes to one of the above, I want to ask you ‘why not’? I am a true believer in ‘everything happens for a reason’ and if this wasn’t a huge wakeup call I don’t know what is.
We have been taking our health, relationships and finances for granted for decades now. I am not the first to write about what 2020 has taught us but I am here to reiterate it for those of you with federal loan debt.
How you focus your time and energy with your finances these coming months will have a major impact on the rest of your life, good or bad.
Are you going to continue to look the other way at your debt, knowing it will ‘get paid off eventually’. Or are you going to jump in the deep end, as hard as it might be, and create a plan to change your future for the better?
Get started with tracking your spending with this free tool to see where your money is currently going. We can’t change our futures unless we dig into our past.
Bouncing Back After #livingmybestlife
Keeping up with the Joneses is expensive. Spending excessive amounts of money on going out to eat, a quick trip up north or that thing at Target adds up quickly and is a major reason Americans struggle with debt.
I am here to tell you that overspending just by a little in a handful of areas may be the reason you are carrying a balance on your credit card.
According to an article in usatoday.com, “Groceries are the number one reason why people carry a balance.” One explanation for increased credit card debt is that we put everyday expenses on credit cards, when we once used to pay for these items in cash. Dealing with other debt payments, we are strapped for cash at the end of the month, unable to pay the full balance on our cards.
Here are some tips to get ahead of your credit card debt after you had a couple months of excessive spending:
Look at your spending and figure out which categories caused you to not make your payment in full
Determine a spending limit for all your budget categories and make sure it adds up to less than your monthly household income
Use that extra money to pay extra towards your credit card balances
Check your spending before each purchase to make sure you haven’t hit your category limit
Make sure you are not spending just to qualify for rewards or card benefits, you can do this once you get your balance back to zero
If your credit card balance is not manageable, but you would be able to pay it off within a year, look at consolidating onto a new card with 0% APR.
The thing to remember is that consolidating to a new card or rolling the debt over with your mortgage does not solve the problem at hand. Be sure you are proactively creating a spending plan before each month and really sticking to it. By following a plan each month you will be able to ensure you have money extra to pay down debt.
How Much Extra Should I Be Paying on My Student Loans?
This is a fun question because when I start digging deeper into your finances as a coach and I tell you how much you can afford on paper - the jaws drop! We have been trained to think that if we are making our minimum payments we deserve a pat on the back - because we did it! Right? We didn't have an adjusted payment, we aren't in forbearance, we made the payment. Well, sorry, but no.
That minimum payment will cost you tens of THOUSANDS of dollars in interest that frankly, you can't afford. Nobody can! In most situations you should be able to pay double (at least!) on your loan to get rid of it! There are a lot of financial calculators online, I like Unbury.me, that help you play around with various extra payment amounts to find out just how long it will take you to pay off your debt.
Give it a shot, it's really motivating to see if you pay just a little extra each month, the number of years you can knock off the term of your loan!
Keep Paying Your Federal Student Loans While They Suspended, Here’s Why
Right now you are not required to may a payment on your federal student loan, sounds great right? Wrong! If you are still employed, or your household can afford to make your monthly loan payment, you should continue to do so. And, this may sound crazy but, pay extra!
Think about it this way, normally you have interest tacked onto your loan each month. So when you make your payment, some goes to the loan and some goes to interest.
Right now, with your payments, 100% of it is going directly to the principle! That means that every penny you are sending to your lender is paying down your debt.
Of course, if you are worried about making rent or buying groceries you should hold off. But, if you are one of the lucky ones, hit it hard!
What to Do With Your COVID Stimulus Check
So, this stimulus check. What about it?
First off, check out this link to see the details on how much you may be receiving. Amounts vary but are up to $1,200 for individuals and $2,400 for those filing jointly (with $500 per child also in the mix). If you are behind on child support you won't be seeing a check. You will receive this money via direct deposit or a check in the mail, depending on your last filing method.
What should you be doing with this money? I can tell most of you that the answer here won't be to spend it. There are a few easy scenarios to cover but if you think your situation is a little more unique you can always reach out.
If your job is stable, you are not worried about lay-offs or reduced hours, this money should go towards any debt you may have. Let's say you don't have debt, then it should go towards your savings. If you have a five month emergency fund you can always invest or, my personal favorite, make a donation to an organization that is doing some good right now.
If you are at all questioning your employment then it should go towards your necessities and any leftover funds should go straight to savings. What are necessities? Rent/mortgage, gas for your car, food and utilities. Netflix? Nope. It's only $8.99/mo - nope. Getting food to go because you can't stand to cook anymore? Nope. Birthday gifts for friends because you feel bad they are stuck at home? Nope. Nope. Nope. You lost all or some of your income, it's time to save every penny you can.
Be safe and be smart out there!
This Is What Debt You Should Pay off First!
Debt, a lot of people have it but no debt is good debt. Hear me now, I will say it again. YOU DON'T WANT DEBT.
Ok, now that we got that out of the way, if you do have debt and you are trying to get rid of what, where do you start? Reminder, no judgement, I was there too with a scary amount of student loans, but I am here to help.
Ok first, we want to list all debts from largest to smallest. I also like to put the interest rates next to them because it might effect things.
After we list all our debts, we are most likely going to pay the smallest debts first. This is snowball method, you can also use the avalanche method which is where you pay off the highest interest rates first. Back to paying off the smallest, this helps with creating easy wins as you pay them off. If it takes you a year to pay off one debt (let's say it's your largest), a year is a long time before you get a win in your journey. Too long and it's hard to keep up momentum.
With that, if you have a $300 credit card bill that is at 25%, we gonna get rid of that.
Back to the plan, once you pay off your first debt, that money then rolls into your payment for your next debt, and so on. And that's it! Easy right? Stay on track, remember your why and life will be grand on the other side.