Graduating in Debt? Here’s How to Manage Student Loan and Credit Card Payments

Student LoanSo, you’re a new college grad — and many adventures lie ahead!

Also dead ahead: reality. For instance: once those paychecks from your first real job start rolling in, it’ll be time to make those student loan payments. A tall order, indeed — with the average college grad finishing school with student loan debt to the tune of $35,000+.

As if that weren’t enough, many college grads are also staring at heaps of credit card debt they amassed in the process of trying to make ends meet during years of being a broke student.

If that sounds like you, you’re probably feeling overwhelmed; you may wonder how you’ll ever possibly pay it all off. However, it’s definitely possible. Here’s how…

All Debts Are Not Created Equal

First, you need to understand the difference between “good” debt and “bad” debt  —  and which debts to focus on paying off first, and how to go about it. Once you have a plan in place for dealing with your debt, you can begin working toward a more secure financial future in which debt — at least “bad” debt — plays no part.

If you’ve never heard of “good” debt or “bad” debt, you may wonder what those terms mean. “How can debt possibly be good?” But while all debt is debt, some debts can benefit you financially while others will just drag you down.

What’s the difference? Good debts are those that help you create value:

  • Student loan debt is good debt, provided you finish your college education, because a college degree increases your earning power by more than $800,000 over the course of your lifetime.
  • Mortgage debt is good debt, because the home you borrow-to-buy will most likely increase in value significantly over the course of your loan, so you’ll end up with a home worth much more than you borrowed to pay for it.

Bad debt, on the other hand, is debt that doesn’t increase your overall worth.

  • When you borrow money to buy something that goes down in value after purchase, you’re incurring bad debt.
  • Auto loans are considered bad debt, because cars typically depreciate in value immediately.
  • Credit card debt is also bad debt, because most of the things you buy with a credit card lose value right away.

Know Which Debt to Pay Off First

One of the biggest differences between student loan and credit card debts is that credit card debt typically carries much higher interest rates. That means you’ll pay more for the privilege of borrowing that money.

It also means if you stick to making just the minimum payment on your credit card debt each month, you could conceivably be stuck paying off that debt forever — and end up paying much, much more than you would have if you’d paid a little extra each month.

If you owe $15,000 in credit card debt with a 17 percent interest rate and make only a minimum payment of $250, for example, it will take you 11 years to pay off your debt, and you’ll end up paying $18,000 in interest.

Student loans, on the other hand, are installment loans. This means that if you make your regular payment each month for a certain number of years, you’ll be guaranteed to pay off your student loans in that amount of time. You can save by sending extra money to pay off your student loans faster, but if you’ve got both credit card and student loan debt, it’s a good idea to focus on paying back your credit card debt first, sending as much above the minimum payment as you can afford each month.

Once you have your credit card debt under control, focus on repaying your student loan debts. Just make sure your payments on both debts are timely each month; missed payments will lower your credit score, for which you’ll pay in the form of higher interest rates later.

On the other hand, a history of regular payments will boost your score. In fact, getting a student credit card can be a good way to establish your borrowing history while you’re in college, and if you’ve somehow managed to graduate without a credit card, getting one now can help you establish your credit rating.

Build a Secure Financial Future

Now that you know the difference between good and bad debt, and you have a plan for paying back your student loans and credit card debt, it’s time to lay the foundations for a firm financial future:

  • Start an emergency fund to help you avoid increasing your credit card debt, and take advantage of credit card grace periods to avoid paying interest on new purchases.
  • Try to avoid or minimize bad debt in the future — if you have to borrow to buy something that will decrease in value, you should either avoid making the purchase, or borrow as little as possible.
  • You may be able to avoid charging new clothes, for example, but you’ll probably need to borrow to buy a car. Try to avoid borrowing more than you absolutely need, and look for a car that will cost less to operate than your previous car, so you’ll be better off financially.

Student loan bills and credit card debts can be daunting when you first finish school, but pat yourself on the back — you’ve earned a college degree, and that’s a great achievement.

While those debts may seem insurmountable, they’re definitely not, as long as you have a plan and a little discipline to stick to it until you achieve this next important goal!

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