Student loans are reaching crisis levels in the US with more than 40 million American students facing a collective debt of over US$1 trillion in 2015 (Consumer Financial Protection Bureau). Coupled with an average credit card debt of USD3,200 upon graduation, it seems like undergraduate students should be swapping their university degrees for certificates in financial planning and budgeting.
If you do not wish to contribute to such worrying data, here are some useful tips to aid you in your attempt to reduce your undergraduate debt.
Minimising the debt
Before you even think about taking on a loan to support your undergraduate studies, you should consider all cost-saving options. Taking on part-time jobs and staying with your parents during the course of your studies are simple and effective ways to save money and reduce the overall debt incurred once you decide to take on a student loan.
Another cost-saving option is to apply for scholarships. Scholarships are monetary grants that can come from universities, governments, and even companies in the private sector. In most cases, you will be bonded to your benefactor for a few years in return for cash subsidies. If you did not get a good Grade Point Average (GPA), you can sit for written tests (SATs, ACTs and GCE ‘A’ Levels) that can be used to apply for scholarships in place of your GPA scores. Besides academics, scholarships can also be given out based on your ethnic affinity, your non-academic activities (such as sports), as well as your family’s financial situation.
Choosing the right student loan
The next step to minimising your debt is to choose the most cost-effective loan. Enter “types of student loans” into your search engine and you will find a plethora of government agencies and banks offering a wide range of loans and repayment plans. In order to make a well-informed decision, you will need to assess your financial capability and reasonably project your future financial prospects.
The key to choosing the right kind of loan is understanding the kind of interest rates that would best suit your needs. Understanding the markets and knowing the general direction of interest rates and central bank policies in the near future will aid you in your decision to opt for fixed rates or variable rates. It would also be useful to compare your estimated starting salary with the duration of your studies. If you are pursuing a degree in law (typically longer courses with higher starting salaries), you may want to stretch out the duration of your loan or opt for a ‘pay when you graduate’ scheme. This way, you will have more disposable income during the course of your studies. On the other hand, if you’re looking to start your own business once you graduate, you may want to complete your repayment plan as soon as you can.
Once you have your loan, remember that defaulting on your payments is to be avoided. The best way to prevent this is to opt for income-based payments where a portion of your monthly salary will be put aside to settle the debt.
In the event that you unexpectedly receive large amounts of cash (unimaginative Christmas or birthday gifts, winning lottery tickets, a really good day at the casino etc.), make it a point to use the money to repay the debt. If possible, request to have the additional cash put to making principal payments instead of interest payments. By hacking away at the principal payment, you will naturally reduce your interest payments as well.
Credit card debt
While the seemingly obvious solution to credit card debt is not to own any credit cards at all, having a credit card may actually help your financial health in the future. Credit cards usually come with a myriad of benefits like discounts, promotions and rewards points – tools that can help you save money as you spend. Another good reason to sign up for a credit card is to get a head start in building your personal credit history. As long as you are punctual with your payments, you will get to enjoy a positive credit score that will make future loan applications a lot easier. This will come in handy when you are looking to purchase your first car, finance your first mortgage, pay for your children’s education, or start your own business.
As a student, you should be looking at credit cards that cater specifically to your demographic, i.e. student credit cards. These cards usually come with low limits and attractive rewards points programmes. Some may even come with additional rewards for good grades or even 0% annual percentage rates – this allows you hold a balance from one month to the other without incurring interest for a predetermined period of time. Ensure that you keep credit card usage to a minimum (don’t spend more than you normally do just to claim rewards), pay off your balance every month and steer clear of any cash advance features.
Much like Hercules battling the multi-headed Hydra, your debt has the potential to become an uncontrollable beast that will only grow exponentially as you attempt to eliminate it. Financial awareness, discipline and prudence is hence key in minimising the risk of becoming another statistic in the latest financial report on global debt.