POP! Student Loans

We have talked about the dangers of high interest credit card debt and deciphered the mess that is APR, but now it is time to turn our attention to the type of debt that we incur for personal development:

STUDENT LOANS

I could rant for hours, days, weeks, months, years about the stupidity that is the American higher education system – the exorbitant price of college and universities in the United States is just plain ridiculous. Other countries’ higher education is more reasonably priced (at least for their own residents), but that doesn’t necessarily eliminate student debt in those countries – it just softens the blow, by a lot of zeros.

For a list of countries that offer free (or very cheap) high education, click here. It may be too late for me, but save yourselves – save money – travel the world – get an education… you can do it!

For everyone else who already went to school and racked up a hefty amount of student debt… ugh, the worst, right?! I didn’t even have that much student debt (only undergrad student loans of about $26k) – but it was enough to make life more difficult after graduation. I have friends with $5k, $10k, $20k, $50k, $100k, +$150k debt in the form of student loans from their undergrad or advanced degrees (MBA, JD, etc). Outrageous.

Now that my rant is over (for now), let’s get down to business.

When you were listing out liabilities for the net worth calculation, there should have been one row for each student loan you have. Count them ALL. When I first did this exercise, I had three different companies managing my student loans. Take great care in knowing who owns your student loans, because this can change. They can be sold off to a variety of different providers and as a result, you have to keep track of where that debt is being held.

We are going to start with that list (student loans and the current outstanding balance) and add a really important column to it: interest rate. Your table should look like this:

Student Loan (Company) Outstanding Balance Interest Rate

Like with your credit card debt, let’s figure out your Prioritization of Payment or POP. Take your list of student loans, balances and interest rates… and put in POP order – highest interest rate first and work your way down. This is your plan of attack – prioritize paying off the student loans with the highest interest rate.

The interest rate listed on your student loan statements or loan information is typically reported as an annual figure. Very much like APR for credit cards, student loan interest is compounded on a daily basis, meaning that the annual interest rate is divided by 365 days in the year and that amount is then applied as daily interest to your outstanding balance.

When you repay student loans, the amount that you pay first goes to pay interest and only if there is money left over in your payment, does it decrease the actual principal balance of your student loan.

The higher the interest rate, the more your monthly payments are going just to cover the interest on the balance, not the principal amount of the loan itself – you need to be making payments that cover more than just the interest payment or your loan balance will actually increase every single month. For the longest time, my minimum payment (as recommended by the loan company – insert eye roll) was a lot less than the interest accruing every month, so my loan balance continued to grow for years… oh the regret.

Do keep in mind that in terms of holistic financial priority, you should be looking at paying down your debt based on the interest rate – if you have credit card debt and student loans, your POP should be listed from highest interest rate to lowest, regardless of the type of debt. For example, you may have a student loan with a higher interest rate than one of your credit cards, so in terms of priority, you would want to pay that student loan off first.

I will be setting out options for improving student loan repayment very soon – stay tuned.

Sincerely yours in harmonious fun and fiscal responsibility,

Rachel

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