3 basic but crucial things to know about student loans

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As an enthusiastic but distraught student accepted into New York University about a decade ago, I surrendered my financial future to the entities who loaned me the money to attend. I had no idea how student loans worked, and NYU’s meager attempts at an explanation didn’t help much, so I just figured I would worry about all of that later.

Of course, this “later” came for me and most of my peers: seven in ten college graduates have student debt, averaging about $ 30,000. Like many others, I conscientiously but thoughtlessly make my monthly payments, mostly resigned to being in debt forever.

But robotic monthly payments don’t have to be the whole story. I’m not ashamed to admit I don’t know much about money, but my mate Ron Lieber – The Times’s personal finance columnist – sure.

Here are three lessons I learned from Ron on how to be more strategic when it comes to student loans. (And let’s assume you’ve been paying them for some time. If you’re just starting out, it’s a good place to start, as if The Times Student Loan Calculator.)

Let’s start at the beginning with main and compound interest.

The easiest way to understand this is to just see it in action: Play with our student loan calculator here to see exactly how your loan payments are working.

When you make a student loan repayment, your money is applied first to interest and then to principal, which is the original amount you borrowed. If your payment is late, however, your money is applied to your late fees first.

As your principal decreases, the interest you pay also decreases because you only pay interest on the remaining balance. This means that over time the proportion of your payments that goes to your principal will gradually increase. This is a good thing.

Maybe, but in most cases probably not.

The most important thing to consider is whether, in the (very) long term, you will make more money by getting rid of your student debt sooner or by putting that extra payment money into a savings plan. -retirement.

There are many variables that go into this decision, but in almost all cases the best solution is to put that extra money in a retirement savings account before spending it on student loans, especially if you have an employer who will match retirement savings contributions. . You can deprive yourself of hundreds of thousands of dollars by giving up your retirement savings early.

Say, like me, you have five student loans with five different interest rates. If you refinance your loans, these five loans would be combined into one loan that would have a single interest rate.

It can be a smart move if you can get a lower interest rate, which can be possible if you have a good credit rating. However, this new rate could be variable and could potentially increase over time. (Your current student loans are most likely fixed, which means the rate doesn’t change.) And, keep in mind that the higher the debt, the more important it is to have the lowest rate possible.

Perhaps an even more important issue to keep in mind if you are considering refinancing is that you could lose access to the benefits you get from federal loans, such as the ability to make payments based on income. (which caps your payments at a certain percentage of your income), loan forgiveness, death and disability discharge, and longer deferral and forbearance options.

As a rule of thumb, if you are doing well with your loans and your interest rate isn’t sky-high, say 8% or less, you don’t have to worry much about refinancing. But if you have a much higher rate than that, you may want to contact a professional for advice on refinancing.

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