How much time does it really take to pay off student debt?
Office Hours #4: AMA (Ask Me Anything) with Mark Eagle
This question was posed by a question during one of our most recent "CareerVillage Office Hours" sessions. During Office Hours sessions, we invite students to pose questions related to a specific topic. In this case, the topic was preparing for life after high school. If you answer this question, we will reach out to the students who attended this office hours session to inform them of your response, and all students on CareerVillage will benefit. If you would be interested in hosting an office hours session on a particular topic, please reach out to our staff!
My school had rotations starting the second year where every other semester we would go on co-op (internship) which allowed us to make money full time for 3-4 months. This would cover my upcoming semesters expenses.
In the end amount of time to pay off debt will be based on:
Debt = Tuition + Living - Scholarships/Grants
Time to pay off = Debt / (Salary - Living Expenses)
Debt ($40,000) = $10,000(4) + $6,000(4) - $6,000(4)
Time to pay off (10 years) = $40,000 / ($40,000(net salary) - $36,000)
*current average student loan debt is $33,000
*living expenses will vary widely on location and frugality
1. how much is the debt
2. how big your monthly payment is
3. when does interest kick in
4. how much is the interest
5. your discipline in sticking with a budget and payment plan
Doing a very straightforward scenario, say you owe $10,000 at an interest rate of 2% per year on the remaining balance, but the payment period starts 1 year after graduation and it's interest free for the first 6 months after the first payment is due. Then, you could enter the information in an Excel spreadsheet. If you're able to pay off $200 per month and your first payment starts on January 2022, then it's possible that the loan could be paid off by March 2026, a little over 4 years. Of course unexpected surprises could come up and sometimes pausing payments or consolidating different loans would change the formula. Paying it off sooner by making bigger payments can be an option, but it's generally a smarter choice to invest your savings towards a higher interest bearing account or equities that can earn more than the interest rate of the loan so that you are really leveraging your money. If you can make a guaranteed 3% interest back on your money, then it makes sense to make minimum payments to pay off your loan at an interest rate of 2%, but continue to invest your money to get a return of 3%.
This is a really tricky question. Student debt can take the full term to pay off (as much 20 or 30 years) or you can make it a priority and pay it off sooner. It really will depend on your financial needs at the time as well as your future goals. Other things like interest rates come into play as well . For example, if interest is very low, maybe you hold off paying your loans since you can use the money for something else. If interest is high, you pay it off quicker if you can afford to.
Don't let debt or the thought deter you though. I fully financed my education and do not regret it. Education is always worth it!
Remember that a loan is not your only option. There are grants and scholarships. There are a lot of scholarships out there through many different organizations. Some are one time only, some may be for multiple years. Ask friends and ask family what organizations they belong to and whether or not there are scholarships available.