This a guest post written by my friend Rebecca from Surviving Student Loans. I absolutely loved hearing her student loan story so I asked her to share it with you to hopefully help inspire you or someone you know that’s dealing with student loans.
College is a great time to learn and grow, but it is also a time when you get saddled with student loan debt (with interest included).
Imaging yourself back as a freshman in college again. The excitement over takes you. Your future is wide open and the opportunities seem endless. However, if you are like many people, you took out student loans to pay for your college education.
What you may not have realized is that by taking out those loans, you have started the clock on a ticking time bomb called interest. The ticking is so quiet that you may not have even known that the clock had started. I assure you that it is there and it won’t stop.
Every loan you take out adds to this interest bomb. Even if you go to school part time, take a break, switch schools, etc., it will not stop accruing. Many people, including myself, did not factor this into their debt for student loans.
It is scary to think how much interest is accruing while you are trying to better yourself with a college education. Interest rates for student loans are often quite high. They can often be 6% or more.
While you are in school, the clock just keeps ticking…
Graduating school is also an exciting feeling. It is finally time to join the “real world”. You may start to think about the debt you have, but many companies offer a 6 month “grace period” before you have to pay anything on your loans.
That is so nice of them, right? Wrong! This gives your loans an extra 6 months to accrue interest. Guess what happens when that grace period is up? BOOM! Your ticking time bomb has gone off in the form of capitalization.
Capitalization is when any unpaid interest is added back into the loan as principal. Now you are paying interest on your interest! This capitalization happens any time you enter repayment, a deferment/forbearance ends, you consolidate you loan, or you change repayment plans.
This played a big part in what happened to me and I want to help others avoid this explosion of interest.
My Own Ticking Time Bomb
In my head I knew what I had taken out: $57K for undergraduate school and $40K for graduate school. I actually thought that it wasn’t too bad because it comes out to just over $14K a year for a four year undergraduate degree. I didn’t factor in the interest.
$40K actually isn’t that bad either for graduate school. I did my degree abroad in the UK. It was a 1-year full-time program. The tuition was about the same as going to an out-of-state school but I did not have to have two years of living expenses which saved a lot of money.
Anyways, in my uninformed head I had $97,000 in student loan debt. My interest bomb went off with an explosion full of tears! My loans had capitalized when I finished my undergraduate and again after my graduate program. I had $30,000 in interest which felt like a nightmare!
I made it my mission to pay off my debt as fast as possible. Last year I was able to pay down $15K of my debt on a $40K/year salary. I hope to make a similar dent to my debt this year.
'I made it my mission to pay off my debt as fast as possible.' - @survivingSLClick To Tweet
I also want to help others with their student interest woes.
What You Can Do About Your Student Debt?
- If you have not yet started college: create a plan of action. How much are you going to take out? Will you work while you go to school? How much can you put to your loans while you are in school?
- If you are a current student or are in the grace period: start paying whatever you can now. Even if you can only pay a few dollars a month it will help you in the long run, especially when the interest capitalizes.
- If you are in repayment: consider refinancing your high interest loans. I was able to bring my private loan from 10% interest to 5.5%. However, you will need to consider the pros and cons. You should also create a debt plan to see how much extra you can afford to throw at your loans.
As you can see, student loan interest is a ticking time bomb that must be dealt with as soon as possible. It is time to kick some student loan butt! Are you facing problems with student loan interest? What is your plan of action?
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