College graduates of recent years have three things in common: a degree, alumni status, and student loan debt (and we’re not talking about the tab you were running at the local pizza place). In fact, American student loan debt now exceeds the GDP of Australia, New Zealand, and Ireland combined. We hope your pizza bill isn’t that high.
All statistics aside, it’s time to have a frank discussion about millennials’ best approach for paying off that student loan debt. Let’s begin by looking at the overall financial situation, or what we call “the debt picture.”
Your Debt Picture
Do you know about all of the debts that you have, including student loans, private loans, credit cards, etc.?
Some student loans are financed through the federal government or your state while others are backed by banks and commercial lenders. Check your records to be sure you know what you are responsible for paying back.
Do you know how much time you have to repay the debt?
Speaking of paying back, you should know how much time you have to do so for each lender. In general, you won’t start paying student loans until six months after graduation, and then you have 10 years to finish your payments. Of course, some loan programs have different terms, so you’ll want to understand what kind of timeline you’re working with here. The same goes for credit cards: if you have a zero percent interest, see how long it lasts.
Do you know the interest rates?
Typically, student loans have very low interest rates, but they vary. If you have more than one loan, check to see which ones have the highest interest rates. While you’re at it, take a look at the interest rates for your credit cards, too. Again, if you have a zero percent card, check to see what the interest rate will be after the zero percent period ends.
Now that you know about all of your debts, their repayment periods, and interest rates, you can move on to the next step: your payoff strategy.
The Big Payoff
Given the enormous balance of some student loans, it’s no wonder millennials are focusing on paying those off first. However, there are a few circumstances where this many not be the best strategy. Consider the following:
High Interest Credit Cards
Students who are new to credit are likely to pay an average APR of 21.4 percent, according to a recent study. If you were paying the minimum balance each month, that APR likely has not changed. Credit cards usually carry the highest interest rates of any other loan types, except for payday loans (which we highly discourage!). For this reason, if you have any credit cards, then you may want to consider paying these off first.
Higher Interest Student or Private Loans
Once you pay off your credit cards, then it’s time to focus on other loans. If you have private loans that were used for anything other than education, they may carry a higher interest rate. If you don’t have any private, non-education loans, then you’ll want to consider paying off the student loans with the highest interest rates first.
Student Loans with the Lowest Interest Rates
This is your last stop on the payoff train. Along with the lowest interest rates, these loans probably afford you the most time to complete the repayment. This is good news, because although these loans may take longer to repay, you may not accumulate as much in interest fees as you would with a higher interest loan or credit card. Consider this: if a student charges $1,000 on a credit card and only pays the minimum due at the average rate of 21.4%, it will take 7.6 years to pay back the debt and the total amount repaid would be $1,941.
If you’re feeling the pressure to pay back your student loans, then you’re in good company. On average, 68 percent of 2013 college graduates took out loans to pay for college. The difference between you and the rest of the bunch is going to be in your approach to paying down debts in a way that works best for you.
As for your junk food habits, that one’s on you.