Although a college degree is usually an essential key to attaining wealth, it often comes with the albatross of private or federal student loans—especially for black students.
Americans owed more than $1.3 trillion in student loan debt in 2016, which is more than the total debts for either auto loans or credit cards, according to the Motley Fool. For about 23 million households that have student loans, the average outstanding debt is near $50,000 each.
The issue is especially urgent in the African American community. Blacks graduate with over $7,000 more debt for a bachelor’s degree than their white counterparts, according to the Brookings Institution.
While blacks graduate with an average of $23,400 in student debt, their white counterparts leave college with an average of $16,000. And the gap grows as the two groups spend more time out of college, the Brookings Institute’s 2016 report said.
However, as tuition costs continue to rise, the necessity of loans continues to grow as well.
As student loans become a part of the new normal, here’s a look at your repayment options and tips to make the transition to a manageable student debt amount possible.
Types of Federal Student Loans
Federal student loans are funded by the government and typically offer a fixed interest rate. The federal loans are low-interest options for undergraduate and graduate students who exhibit a financial need. Federal loans require repayment beginning six months after your tenure in college concludes.
This is a subsidized loan fixed at a five percent interest rate. It is awarded by the university based on financial need.
These loans can be subsidized or unsubsidized and are also awarded based on financial need.
Parent Loans are available to the parents of the student attending college.
Federal student loans have the benefit of having a fixed rate and several flexible repayment options. However, owing money to the government is no laughing matter—the government has the right to garnish wages and tax returns—and federal loans may not cover the full cost of attending college.
Types of Private Loans
There are several private loan options, with a myriad of interest rates and costs. However, private student loans have higher costs and interest rates than federal student loans and usually require a co-signer. Payment on many private loans cannot be deferred until after graduation—some require payments to begin immediately.
State Agency Loans
These are loans sponsored by a state government for students attending a state school.
Traditional bank loans
This is a loan from a commercial bank. A person taking this route will likely need a co-signer.
Some colleges and universities offer in-house fixed rate loans.
Hopefully, the majority of your loans are Federal. They often offer better rates, a lot of payment options, and deferral in case you are unemployed. As you think about which loans to repay first, start with the high-interest private loans, and move down to the low-interest federal loans. This will minimize the amount of money paid towards interest.
Student Loan Repayment Options
There are seven payment options available for federal loans. Find more information about each plan at studentaid.gov
Standard Repayment Plan
The amount of your loan and interest is prorated so you make fixed monthly payments for exactly 10 years. Initially, payments under this plan will be the highest of all seven options.
Graduated Repayment Plan
Payments on this option begin low and gradually increase in periodic increments. This loan is slated for a 10-year payoff.
Extended Repayment Plan
The repayment window is increased to 25 years. Payees have the option of a fixed monthly rate or a gradually rising rate. However, the borrower is required to have more than $30,000 in federal student loans.
Monthly payments are determined based on income and family size for a term of up to 25 years. Payments are capped at 15 percent of the borrower’s discretionary income and readjusted each year.
Pay As You Earn Repayment Plan
A participant’s monthly payment cannot surpass 10 percent of a person’s discretionary income. A person must qualify for financial hardships to be included in this plan.
Income Contingent Repayment Plan
A person pays the lower figure of these two options: an amount based on a 12-year repayment plan that is multiplied by an income percentage factor or 20 percent of your monthly discretionary income.
Income Sensitive Repayment Plan
A similar option to the Income Contingent Repayment Plan for borrowers whose loans do not qualify, the payments are based on a participant’s income.
Think about your current situation and which repayment plan makes the most sense. Any plan lowering your monthly payment increases the amount of interest you pay. Going from 10 years to 25 years means 15 more years of interest.
Here are four tips to ending you student loan debt in less than a decade:
1. Create a budget
Understanding your finances is the first key to limiting your debt obligations, according to The Empowered Dollar. Experts recommend figuring out your monthly fixed costs and subtracting this amount from income to determine your discretionary income. This will provide a better picture of what additional money could be contributed to debt payments without sacrificing essential services. Making a budget also helps create the discipline to start tackling debt aggressively.
“[Creating a budget] gave me a better sense of what I could spend—and what I needed to do to accelerate my debt payments. The other big win was setting up automatic transfers from [savings] account to my student loan lender. I didn’t have to think twice about the money that was being automatically taken out. And that gave me more incentive to pay more than the minimum when I could afford it so I could reduce my debt quickly.”
2. It will take sacrifice
His and Hers Money recommends a simple three-word philosophy: “whatever it takes,” because sacrifice is more than a Big Sean single. Are you willing give up cable? Are you willing to stop going out for dinner? Can you go see your favorite sports team or artist in concert less often?
“Making sacrifices is not necessarily a bad thing because it teaches you self-control. It teaches you some discipline and it gives you that fighter attitude. We are doing whatever it takes and at times that may mean that we have to spend less time in the restaurants just so we can throw more money on that mortgage… Adopt that mindset of whatever it takes. You are going to go far in your financial journey.”
3. Find a side hustle
There are only two ways to contribute more to student debt: cut expenses or increase income. However, all side jobs are not created equally. Some pay good money, but also require a lot of time and are a mentally or physically strenuous activity. Others pay less but require less time and thought. The worst side jobs do not pay well and require a lot of time. The key is finding a new stream of revenue that requires the right amount of time, effort, and lifestyle. “A good side hustle is convenient, has a flexible schedule, enjoyable and has decent pay,” says Mike Timmermann from Clark.com.
4. Asking for a raise
Negotiating for a higher salary can be an effective strategy to contribute more toward debt payments. However, getting a raise can be trickier than it sounds, as several factors, such as city size, company size and experience contribute toward pay. Research what the market is paying people like you and prepare a plan that outlines your unique accomplishments.
“Start preparing to make a case for why you should get a raise. Even though you think you deserve one, that might not be as obvious to your boss as it is to you. It’s up to you to convince him. Sell yourself just as you would if you were trying to get a prospective employer to hire you” says The Balance.
It’s not that bad
Student debt may feel like a huge burden, but there are many others going through it with you. You have options and tools at your disposal. Learn them and make a plan. Soon, you too can make your own rap video about paying back Sallie Mae or buy an investment property.
If your looking to build wealth and get closer to financial freedom, while tackling your student debt, be sure to join the Wealth Noir Community and connect with like-minded Black millennials building wealth.
Chris Shelton is an experienced writer and editor based in Houston. His work has appeared in the Houston Chronicle, South Florida Sun Sentinel, Orlando Sentinel and Houston Business Journal. He enjoys lively discussions about personal finance, sports and trap music.