Advanced Debt Seminar

Understanding the fine print

If you were born between 1980 and the late 90s, you’re likely no stranger to student loan debt or high credit card balances. We sat down with one of America’s leading personal finance experts and host of the popular financial podcast, So Money, Farnoosh Torabi to discuss student loans, credit cards, and how to overcome debt without having to sell all of your possessions and live in a yurt.

STUDENT LOANS

The average student loan debt has tripled in the last 20 years.1“Households across the United States are carrying $1.26 trillion in student loans, making it the second largest category of debt behind mortgages,” says Torabi. Once you leave school, it’s a good idea to set up automatic payments. This will help ensure you never miss a payment and avoid falling into default. Defaulting on student loans can have serious repercussions. In cases of default, a borrower can garner your wages, tax refunds, and social security benefits. “Stay clear of the default monster and enroll in automatic payments as soon as you can. Peace of mind is never underrated,” says Torabi.

If student loan payments are squeezing your wallet too tightly Torabi suggests extending the term of your loan, by 10, 15 or even 20 years. “While this may mean paying more to pay off the loan over time, it can give you some monthly financial breathing room,” says Torabi. “Once you start earning more money, ramp up your payments so you’re paying more than the monthly minimum. Apply extra payments toward the principal to knock down the debt even faster.”

Never underestimate the power of government programs. They’re here to help. For example, if you have federal student loans you may want to consider applying for Income-Based Repayment (IBR). Through this government program, qualifying borrowers can cap their loan payments to a percentage of their income (typically ten percent). IBR also forgives any student loan debt leftover after making payments for 20 to 25 years. Another program, the Public Service Loan Forgiveness (PSLF), is offered through the Department of Education for those working full-time for a ‘public service’ employer. After ten years of employment, PLSF may forgive your remaining federal loan debt.

Finally, consolidate your loans if you can. You can consolidate your loans under the U.S. Department of Education’s Direct Consolidation Loan Program. If you have private loans, contact the private loan provider. Consolidation can sometimes lower interest rates.2An A+ move in the long-run.

It can be overwhelming to graduate college with large amounts of student debt. You’re in the red before you even get started. Torabi suggests “making room for debt payments, and sticking to a budget.” Make sure to cap monthly housing costs at to no more than thirty percent of your take-home pay, she advises. “And if your schedule allows, consider taking on a side hustle to create an additional income stream to more aggressively pay off the debt.”

“Stay clear of the default monster and enroll in automatic payments as soon as you can.”

CREDIT CARDS

If you think Millennials carry the most credit card debt, you’re wrong. It’s Gen Xers.3“If you have debt on more than one credit card, attack the card carrying the highest interest rate first because that is your most expensive debt,” says Torabi. “Put as much money toward that card as possible while still meeting the minimum requirements to pay off the debt on your other cards.” Later, once that card is paid off move to the next card with the highest interest rate and so on. “In general, when paying off credit card debt you want to start by paying more than the monthly minimum, which can easily keep you in debt for years,” says Torabi.

When it comes to rules of thumb, there’s one golden rule: pay more than the minimum.4According to Torabi, “paying off credit card debt can take anywhere from weeks to months or even years. It depends on how aggressive you can and want to be.” For example: Someone with $10,000 in credit card debt with a 15% APR, paying just the minimum is likely to stay in debt for 28 years! But paying double the minimum each month can speed up the payoff to less than 2 years!”

BECOME A PHOENIX

Debt can be heavy burden to bear. Make a budget and stick to it. Avoid becoming locked-in a Sisyphean struggle. Torabi elaborates, “there’s no question about it—for many, debt can be a heavy emotional burden. I think it’s important to be realistic and hold yourself accountable by establishing mini goals and surrounding yourself with supportive people and resources.” If you have credit card debt and need help creating your action plan, she recommends seeking advice from the National Foundation for Credit Counseling (NFCC). They’ll help create a debt management plan and perhaps even work with creditors to lower your interest rate or temporarily waive fees. Money Management International is another great tool. Like with the NFCC, the first meeting and consultation is free. From there, you may decide to join a debt management program for a nominal monthly fee, says Torabi.

It may seem hard to see the light at the end of the tunnel now, but don’t worry—becoming debt-free isn’t an outlandish possibility. It’s actually highly likely if you develop a payback plan and stick to a budget.

Understanding your finances and getting out of debt today are keys to building a financially successful life in the future. Start now so you can work your way towards the big things in life, like Coachella tickets, a deposit on a self-driving Tesla, or a down payment on your first home. Sayonara yurt. You were nothing but a bad dream.

KEYS TO UNDERSTANDING DEBT

Set up automatic payments for repaying student loans

Consider IBR for your student loans

Research if consolidation lowers your interest rates

Pay at least double the monthly minimum on credit card bills

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