Tips to Help Reduce Your Debt
By Derek Hamilton, OD
Student loans can be intimidating. Educational debt is often the biggest obligation facing new graduates. The best way to tackle student debt is to have a plan. And paying loans off early can save thousands of dollars, giving graduates the option of investing in great opportunities such as buying a house or a practice. Here are five ways to take control of your finances and pay down debt early.
Make Smart Choices
Current students have the best opportunity to make repayment easier. Only take out loans that you truly need. Live frugally.
Be sure you exhaust all federal aid prior to taking out private loans. Federal student loans are safer, have fixed interest rates, take 9 months to default and have terms that allow for income-based adjustments in repayment.
New graduates should aim to keep costs low. Optometry school made you an expert at living cheaply. Take advantage of this skill and continue to be thrifty until you become well established. Avoid new financial commitments — especially big-ticket items such as houses and cars.
Six months after graduation, federal loans will go into repayment. During this period, borrowers can consolidate — or take out a new loan that combines separate federal loans into one.
Consolidation combines multiple payments and allows the borrower to change the terms of the loan. The repayment period can be adjusted and, in some cases, the borrower may be able to reduce the overall interest rate.
The American Optometric Association’s AOA Excel program offers competitive rates, a 0.5% interest rate reduction for membership and the convenience of auto payments. A half-point reduction may not seem like a great deal, but it makes a significant difference over the life of the loan.
Bimonthly payments are a well-known mortgage trick that can be applied to student loans. This will shave years off your payment period and save tens of thousands of dollars.
Loan servicers require monthly payments on student debt. But with a bimonthly approach, you split your monthly bill in half and pay that amount every 2 weeks rather than the full amount once a month.
Let’s say you graduate with $80,000 in debt, financed over 30 years at a fixed rate of 6%. Monthly payments will be about $480. If you make payments of $240 every 2 weeks, you’ll save more than $20,000 in interest over the life of the loan and you’ll finish payments on the loan 5 years earlier!
The strategy works because there’s less time for interest to accumulate between payments. And since you make 26 half-payments (equal to 13 monthly payments) you effectively make one additional payment per year.
Some loan servicers offer a reduced rate for auto-debit. Graduates should take advantage of this. Keep in mind that auto-payments may prevent the borrower from making biweekly payments, but you can still significantly decrease the length of the loan by increasing principal in monthly payments.
For $80,000 financed at 6% over 30 years, an addition of $25 to the monthly payment will result in paying off the loan 3 years earlier. And an additional $100 per month will turn a 30-year loan into a 20-year loan.
Corporate optical centers will often pay bonuses if a graduate is willing to relocate to a place where they’ve had difficulty hiring an optometrist. Additionally, the U.S. military and the Public Health Service offer great loan repayment packages. If you’re mobile and adventurous, these may be good opportunities for you. Some private employers also are willing to help with loan repayment even if they don’t offer it in their normal compensation package. You may just have to ask.
Student debt isn’t all bad. It's the tool that allowed you to earn a degree and practice optometry. The interest paid on the loans is even a tax deduction. But nobody wants debt, so be aggressive, form a plan and get debt paid off early. nOD
|Dr. Hamilton is a 2006 graduate of the Michigan College of Optometry. He lives and practices in Austin, Texas, where he’s owner of Wells Branch Vision Care.|