The statistics get tossed out all the time: College costs are rising faster than the cost of living, wages for workers with bachelor’s degrees are falling, the unemployment rate for 20-to-24-year-olds is sitting in double-digits — all while U.S. student debt exceeds $1 trillion.
But for recent college grads facing their first payments or still trying to get on top of a seemingly never-ending stack of debt, those aren’t just statistics in a bigger argument about whether or not college is worth it … they’re reality.
We can’t offer a magic wand to make that go away; short of an unexpected inheritance or Powerball win, it’ll be a long process. But young graduates can follow these four simple rules to keep their heads above water.
1. Know your loans
Sound basic? It is. It’s also overlooked much of the time.
The fact that any student walks away from higher education with six figures of debt is the first sign that something’s lacking in terms of student loan education. And many recent graduates can’t even tell you how many different loans and lenders they have.
So, first things first: It’s important take note of each loan you’ve taken out over your eight (or more or less) semesters of school. Also, make sure you know your options for each one, as most loans have alternate plans available to help ease the burden. A graduated repayment plan increases the amount paid over time, while income-based and pay-as-you-earn plans are also available for those with financial hardship.
(You can find out which plans are available for different loans here.)
And if you have a Perkins Loan through your school, the details are probably different. Each one I took had a much later start date for repayment, for example.
By knowing your loans, you decrease the risk that you will forget about any stragglers you don’t have to pay right away — or could even start paying them early if you have the funds available.
2. Beware of interest
Another detail to understand: interest rates. For one, if you happen to have some extra cash and decide to pay off a loan early, pay the one that’s going to accrue the most interest over time. Also, be aware that it often takes longer to pay off your loan if you opt for an alternate plan, so you end up paying more because of interest.
Interest rates also are sneaky if you choose to defer or forbear your payments. One friend of mine continued his education after college, which deferred his undergraduate loans. Two years, two degrees and at least two more loans later, he has again pushed off his loans — and hopes to return to school soon, which would defer them some more.
When you are in school at least part-time, you are usually granted a deferment. That means your interest won’t accrue … if you have a subsidized loan. But if you have an unsubsidized loan or are instead granted a forbearance?
Interest will continue to accrue even though you aren’t yet required to make payments … and boy, can that add up. After just one year of forbearance on a $10,000 loan with 6.8% interest, you would be saddled with paying 25% in extra interest over the life of the loan.
Many students who push off their loans don’t realize they are actually sinking even deeper into debt.
3. Don’t be short-sighted
For most young graduates, making monthly payments and maybe moving out are top financial priorities. Retirement? Probably not even on the radar.
Workers under age 35 have the lowest 401k participation of any age group, and that participation has fallen even more in recent years. Don’t let your monthly loan payments overshadow the big picture, though. The earlier you start saving, the more room you have for mistakes — and more time you have to compound your gains, as InvestorPlace Editor Jeff Reeves explains in detail here.
For recent graduates, I would recommend signing up for your 401k immediately upon getting hired, so you are accustomed to having that money set aside. If you push it off, it might be harder to see your paycheck dwindle once you decide to get started.
And if your employer offers a 401k match, definitely put in the maximum amount, unless you absolutely can’t afford it. It’s free money — you’ll be thanking yourself in 40 years or so.
4. Be smart
The delinquency rate for student loans recently jumped above the rate for all other consumer loans — including credit cards and car loans — for the first time ever. Subsequently, the number of defaults has been rising steadily over the past six years — and defaulting can hurt your credit score for life, and even harm your chances of getting a job.
So besides making a plan for repayment, outline a monthly budget — with how much you will spend on gas, rent, food, loans and so on — to keep on track. Along the same lines, setting up your loans for automatic repayment as soon as you get a paycheck is another surefire way to make sure managing your debt is a top priority.
Definitely don’t push your student loans off so you can go out and buy a new car or eat out every meal. And don’t forget to pay your loans or accidentally spend your loan money elsewhere; both could lead to delinquency and eventual default.