How to tackle student debt once and for all
The student loan crisis has reached $ 1.6 trillion in the United States. Needless to say, paying off student debt can be daunting and confusing.
In this episode of In The Know’s Getting Rich, host Carmen Perez shares everything you need to know about navigating today’s student loan minefield.
âWe’re all expected to go to college after high school and about 70% of them will take out a loan to do so. But how many of us actually understand how they work? Said Perez.
Federal loans vs. private loans
When trying to cover tuition fees, you usually have two types of loans: federal and private.
âA federal loan is covered by the Ministry of Education where private loans are made by a private company or a lender,â she explained.
High interest rates
Interest rates can come to you quickly and force you to pay faster than you might have imagined.
âThe interest rate is the percentage of your principle that is added to your amount owed at the end of each year,â she said.
For example, if you have a 2% interest rate on a $ 100 loan, but you haven’t made any payments, at the end of the year your bill would be $ 102.
âIf possible, start paying interest while you’re in school or during your postgraduate grace period,â she says.
Tackle the main
If you make minimum monthly payments, you may only be paying the interest on your student loans. Perez suggested aiming for a bi-monthly payment schedule to reduce the balance.
âPay extra and make sure the money goes to the principal if you can,â she says.
Debt snowball versus debt avalanche
The financial expert recommended taking a holistic approach to tackling student debt.
âYou want to cut your expenses, stop taking on debt, but also have a plan in place to deal with your current debt,â Perez said.
There are two ways to do this, the âdebt snowball:â and the âdebt avalancheâ.
âThe Debt Snowball organizes and pays off your debt from the smallest balance to the highest balance, regardless of the interest on it,â she said.
Your student loans will be on the higher end, even if they have a lower interest rate.
âWhat you do is make the minimum payment on all of your debts except the first one you have on your list, your smallest debt,â Perez explained. âYou invest as much money as possible in this little debt. Once that has been paid, you transfer all that money that you paid in that little debt to the next debt, etc. Until everything is paid off.
The debt snowball is all about racking up small wins and practicing healthy habits to pay off all of your lingering balances.
âThe debt avalanche pays your debt at the highest interest rate at the lowest interest rate, regardless of the balance,â she said. âSo you would organize it the same way. You pay as much as you can on that first debt with the highest interest rate, while paying the minimum on all other debts. ”
This is the most mathematically rational approach to paying down debt, as it relates directly to interest rates.
ITK Live: Kitchen Gadgets – Happy Hour
If you liked this story, check out more get rich episodes here.
More from In The Know:
The model exposes the ‘insane’ capabilities of the editing application
I understand why over 18,000 Amazon reviewers love this touch desk lamp
TikTok loves this metal straw that folds into a keychain – and comes with a cleaning brush
12 tech gadgets that made my life so much easier while on lockdown
The message How to Tackle Student Loan Debt Once and for All first appeared on In The Know.