A student loan can become a burden when it grows through compound interest due to little or no repayment instalments.
Typically, the graduate finds that repayment clashes with other financial goals and commitments. Most graduates are eager to move on to considering postgraduate studies, getting married, acquiring a car or house or even starting a family. Repaying a student loan, or furthermore fast-tracking repayments, tend to clash with desired plans for future life and related finances after graduating.
This article sets out six tips for managing a student loan:
1. Right from the application for the loan, the borrower must get and record specific details about the loan – the principal, how interest will apply to the debt, the expected repayment period and any penalties that apply, especially penalties for early or late repayments. Ensure that the loan agency chosen has the borrower’s current address and contact information. It is essential that the borrower insists that any changes to the loan arrangement be communicated promptly and in writing and that an annual statement be provided.
Based on the information provided on approval of the loan, before committing to taking the loan, the borrower should examine carefully the facts of the loan in light of his planned life goals and set specific targets that balance these goals and the goal to repay the student loan as soon as possible after graduating. Considering these aspects in detail up front will lessen the likelihood of the graduate eventually downplaying the importance of promptly repaying the loan.
2. Conscious of this debt right from the beginning, the student’s next recommended step would be to create a budget that can reveal any opportunity to make a payment towards the loan balance, or not draw down the full amount of the loan for the academic year, during each year of his programme. Any such opportunity will pay off handsomely in the long run.
3. Similarly, any extra funds available from gifts, temporary or full-time work, or other unexpected windfalls, can assist with repaying the loan balance. Let the annual statements build motivation to see the loan balance disappear as soon as possible.
4. The student or graduate should avoid accumulated additional debt like credit cards. Credit card debt can so easily be built up and will be just an additional debt, typically at higher interest. However, a credit card can serve as a secure, convenient and efficient way of spending once no interest charges or penalties are incurred. Where the student or graduate has the discipline necessary to manage a credit card in this way, then there will be no additional debt problems.
5. Where there is more than one student loan, any extra payment, after payment of the required monthly instalments, should be applied to the loan with the higher interest rate. The student needs to consider any proposed consolidation carefully too. Consolidation sometimes results in longer planned repayment periods with more of the funds allocated to interest rather than repaying the principal.
6. Finally, every graduate who has had the burden of managing a student loan needs to consider his own children. In turn, the graduate should undertake to help his children, not only by preparing for their tertiary education, but also by helping them to understand and plan the financing for their studies and their future life with as little debt as possible.
Deftly handling debt, especially debt which involves compound interest, will work out to be one of the best investment ever made in the long run. There are significant savings to be made. Such savings can further fuel spectacular growth in personal wealth through investments in instruments which, in turn, provide compound interest returns.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
• This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.