Student Loan | First Person: Attacking My Student Loan Debts, While Maintaining A Flexible Budget

January 14, 2012 – 4:26 am

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Like many others who choose to pursue higher education, one of the biggest drawbacks was the financial investment needed for tuition, room and board. For those of us who do not have the financial resources to pay while attending, we have the option of student loans.

Even Though I Had a Scholarship

I had to borrow money under the Stafford Loan Program from the Department of Education for my graduate school education, when I earned my MBA. My scholarship and graduate assistantship covered the costs of my tuition and a small stipend of $1,500 per semester. The Stafford Loan Program offers loans a borrowing up to $20,500 annually and has an annual interest rate of 6.8% with a repayment period of at least 10 years. For my time in graduate school, I borrowed just under $13,000 to complete my studies. I borrowed just over $4,000 from one lender and about $8,500 from another lender.

Time To Repay These Student Loans

When I started having to pay back my loans, I discovered that one of my two lenders forced me to have to pay back their loan in less than 10 years. That was because there is a law requiring that at least a $50 monthly minimum repayment to a lender for any federal student loan. That caused my loan that was just over $4,000 to have a repayment schedule less than 10 years. My larger loan had a monthly repayment that was larger than $50 a month and is for 10 years.

How I Have Chosen To Repay These Loans

I have a strategy for each loan that has changed over the repayment period of these loans. For the smaller loan, I have decided to pay that one off first, even though the interest costs are significantly less than the larger loan. Originally, I was trying to pay on the larger loan, yet with it having a lower repayment interest rate (6.3% vs. 6.55%), the interest expense is much more over time. However, I have changed my strategy because of the ability to “snowball the debt“.

Snowballing the debt allows me to use the cash needed to pay the minimum payment on the smaller debt when it is repaid to pay off the larger debt. Though it will not generate the most savings on interest, it offers me more flexibility to use my income/cash flow on other needs, such as building a larger emergency fund, pay down debt, or begin saving for assets such as real estate or a vehicle.

Flexibility Is Key

As I have discovered in the process of eliminating debt, I think my best option is to create a budget that allows for continuous flexibility. In my financial life, getting rid of my student loans has become the second biggest priority after continuing to have flexibility in my budget. I want to have as many options as I can when I comes to altering my financial plan.



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