6 Tips for Tackling Debt & Student Loans
LearnVest Founder & CEO and Entrepreneur in Residence Alexa von Tobel talks about clearing the way to financial freedom—one debt at a time.
Debt, whether good or bad, can be a scary thing to face. For starters, it means ripping off the band-aid and figuring out what you owe. Let’s dive into some of my favorite tips for tackling your debt and student loans head on. The sooner you get through your debt, the sooner you can move on to the other financial goals that are important to you!
1. Get organized
In order to tackle your debt, you need to see everything in one spot. Online tools like LearnVest.com can help you get a handle on what you actually owe. Whether you go digital or put pen to paper, start by listing out your minimum payments, total balances and interest rates. Knowing these numbers is going to help you come up with the smartest game plan.
2. Scrutinize your bills
Any extra dollar you can put toward repaying your debt helps! To free up that cash, look for ways to reduce your current bills. Are you actually using all of your phone data and or can you downgrade your plan? Are you really using your cable or just watching Netflix all of the time?
3. Put your debts in order
The question of which debt to pay down first is one that LearnVest Planners hear regularly. Here’s what we recommend: start by paying the minimums due on any debt (so you avoid defaulting!). Then, focus on paying off bad debt first—like your credit cards—before moving on to good debt, like student loans and mortgages. Along the way, remember this rule: tackle the debt with the highest interest rate first. If you’re juggling both private and federal student loans, prioritizing repayment on private student loans can be a smart move. Why? Because private lenders are not obligated to work with you when you are under some kind of financial duress, while federal loan servicers must do so.
4. Consider consolidation
There are a lot of different options for consolidating or refinancing your debts. In general, you want to think about the overall cost to you. For example, maybe a consolidation plan offers lower monthly payments right now—but it does so at the expense of a longer loan term (which can mean that you’ll end up shelling out more interest in the long run!). One type of debt where we often see consolidation is for private student loans. If your credit has improved by more than 50 points since you first took out the loans, you could be due for a lower interest rate.
Once you figure out the amounts that you will put towards each debt, setting up automatic payments can help you put it on autopilot. According to the behavioral economic theory called Prospect Theory, paying these amounts automatically will make the payments feel like less of a loss psychologically. Plus, for some federal and private student loans, setting up autopay can actually lower your interest rate (by about .25 percentage points).
6. Don’t forget to save
While you’re focusing your energy on paying down debts, you may find it difficult to even think about saving. But if something happens, we want to make sure you have a cushion. At a minimum, set aside an emergency fund with at least one month’s worth of take-home pay. Without one, it’s all too easy to take on credit card debt when a curveball happens.
For more advice from Alexa, read her recent columns on personal finance, or visit her online at LearnVest.com. LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc. is wholly owned by NM Planning, LLC, a subsidiary of the Northwestern Mutual Life Insurance Company.
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