As a student who opts for higher studies, you are doing a great job building a future for yourself and your family. Although commendable, only a few people are financed by their families to opt for a decent college after school. Going to college in the States costs between $104,000 to $230,000 per year, depending on the institution. This is why almost 43 million young American adults are indebted by massive federal student loans, to be returned with a hefty tax amount.
Student loans can become an unforeseen but long-term burden if you do not prepare to counter the challenges in advance. Managing student load debt effectively impacts your overall financial well-being and opens doors for future opportunities and loan-related prospects.
Here are some tips and strategies for managing budget for young adults wishing to live a financially stable lifestyle without being overwhelmed by student loans.
Understand Loan Type Before the Acquisition
The type of loan you choose has a direct impact on your income. Students can file for a loan application via a federally registered or private body.
Federal Student Loans
- Federal loans are funded by the government and are known for their flexible repayment and lower interest rates.
- Subsidized Loans: The government takes responsibility for paying the interest rate while you complete your education.
- Unsubsidized Loans: In unsubsidized loans, you are responsible for paying interest during school and the deferment period.
- Direct PLUS Loans: In this type of loan, the borrower is responsible for paying the interest amount. Graduated students can take these loans for post-grad studies or parents/guardians of undergraduates.
- Consolidation Loans: The federal government offers consolidated loans where all your loans combine into one with a single monthly payment.
- Direct Consolidation Loans: This allows you to combine multiple federal student loans into a single loan with a monthly payment.
- Private Student Loans
- Private lenders like registered companies, banks, and credit unions offer private student loans. Depending on your credit and crime history, these companies can decide the interest rate from their registered percentages. Loans provided by private companies have higher interest rates and fewer options as they wish to protect their rights. You can also check with your college whether they provide students with a loan or scholarship program to complete their education.
Conditions for Loan Repayment
Before you finalize the terms and conditions for a student loan, it is essential to understand the type of loan, its terms and conditions, repayment method, and potential interest rate. An understanding of what your financial situation will be in the next few years helps create a better budget for young adults.
Consider the following terms and conditions associated with student loans.
- Interest Rate: The interest rate is the amount you pay on top of your loan. In most cases, the interest rate varies between 4% to 7%, depending on the organization.
- Repayment: From monthly repayments to extended deadlines and income-driven plans, there are multiple ways to get the student loan off your shoulders. Repayment also consists of a grace period after you leave school and get ready for your first loan payment. It can be up to six months in federal bodies and variable if you took a student loan from a private company.
- Terms and Conditions Disclosure: A lender is responsible for providing the borrower with authentic information regarding the loan. Borrowers hold the right to ask lenders about literally anything relevant to the loan.
Plan a Budget
Your income should be divided into a budget to pay your student loan installments successfully. List down the finances you receive monthly. It can be from your job, side business, savings plan, or any other venture you have invested in. Once that’s done, take a moment to analyze your expenses, i.e., things you need to survive. Include rent, groceries, utilities, travel expenses, and anything else mandatory for survival. Remember, we are talking about the basics here.
Once you have the basics covered, separate your monthly savings from the income. Now, the money left is for loan repayments, luxuries, and anything expensive that you plan to buy. Having a breakdown of your cash flow helps you understand whether you should opt for extra income sources to repay the loan successfully or not.
Build an Emergency Fund
Your emergency fund is the income you keep aside to counter unexpected expenses. We can even call it a blessing in disguise, as it gives you peace of mind that funds are available to counter unforeseen costs if your income is unstable. Moreover, with a spare stash of cash, you can rely on something other than credit cards or personal loans if any minor inconvenience pops up.
Let’s imagine a scenario where your income is delayed by a month. Having no savings means you are automatically behind on your schedule, which can reduce your credit score and chances of availing facilities from your loan provider. However, people with an emergency fund are less likely to experience this problem.
In most cases, parents help set up an emergency fund that you can carry forward with your income. However, putting a certain percentage of money away in an emergency fund can assist in building a reasonable amount.
Save Where You Can
Having a luxurious lifestyle is the dream of many, but when you are indebted because of student loans, it is essential to take a break from unwanted expenses and focus on gathering money. Cut down unnecessary costs and allocate that amount towards your emergency fund.
The best way to evaluate your savings is by differentiating between what you need most and what you do not need. For instance, it is possible to survive without new clothes every month, but you cannot neglect toiletries.
If you can’t compromise on your lifestyle, consider starting a financially stable business that brings in extra revenue. You can take this venture full-time as well if the idea kicks off.
Savings increase financial stability in your life so you can accomplish larger goals, such as buying a car or a house.
Final Thoughts
Students acquire federal or private organizations loans to finance their grad or post-grad studies. Different types of loans come with a number of conditions regarding interest rate, repayment plan, and duration of loan.
Before repaying your loan, plan a budget and cut down your expenses so your loans are paid on time. Timely payment of student loans helps build a good credit score and better lifestyle.
