How to Prioritize Which Debt to Pay Off First

If you’re buried deep in debt, you might be confused as to which creditor you should pay off first. Being in debt can be an overwhelming and discouraging experience, but you can turn it around once you begin to take control of your financial situation.

In this article, we’ll look at which debt to pay off first and how to create a plan.

How to Take Control Over Your Debt

Being burdened with massive debt usually brings feelings of depression and gloom. You regret the financial decisions you made, you feel hopeless about your future, and you suffer in despair about not having enough cash flow to survive. You might even feel a sense of isolation when you see others having fun with their money.

The truth is, many Americans carry heavy debt, so you’re not alone. And many financial decisions you might regret come from the increasing costs of housing, tuition, and medical care.

When you gain control over your debt, you’ll be able to build a solid foundation and slowly prepare for rising costs and unexpected expenses.

Part of the despair you feel is not from the debt itself, but from having a lack of control over money. A first sense of relief will come from pulling out your account statements and making a strategy on how to overcome it.

The First Two Steps to Tackling Debt

  1. Know the terms. Read your statement to see balances, interest rates, and any other terms like details on expiring promo balances. Dive in deep and become familiar with your cards and accounts. Having clarity will help you gain a sense of power.
  2. Make a list of all debt. Don’t worry about which creditor to place at the top just yet. For now, list the debt on a piece of paper or an Excel spreadsheet. Write the most important information next to each debt: interest rate, balance, and minimum payments.

You might have two or three different interest rates listed in your statement. Most cards keep track of how much you’ve borrowed for lower-rate promo offers and cash advances. You can split the balances on your list and make two lines if you’ve borrowed money at various rates.

Which Debt Should You Pay First?

You’ve probably heard conflicting information about whether to pay down smaller amounts or work on higher interest rates first.

Paying off high-interest rate loans first is the best way to keep money in your pocket and pay loans off quicker. You’ll save the most money by paying higher interest debt off first because you are getting rid of the debt that costs the most to maintain.

Break Down Large Balances into Smaller Chunks

Both credit cards and student loans have balances that you can split into separate amounts. You may have gotten a special promo balance on your credit card that made your interest rate drop to zero on part of the total. If the interest rate is low on a portion of the card, you should place the low-interest part further down the list.

You can pay your student loan debt this way too. Many people take out both federal and private student loans with different terms. You could have 4 or more student loans, all at different rates by the time of graduation. It’s best to break down the loans into smaller chunks and pay the highest interest loans first.

Another tip? Check out student loan refinancing if you have good credit. It could save you thousands!

Breaking down large balances into bite-sized pieces will make it easier to get rid of high-interest debt that may be weighing the total balance down. It’s also a good way to examine the entire loan and make a  strategy for tackling it.

Make a budget and make sure you have enough to cover the minimum payments for each of your different kinds of debt. Then, put any extra money you have towards your highest interest debt.

Conclusion

If you are buried under a mountain of debt, it can be overwhelming and frustrating. But becoming aware of your total balances and interest rates is the first step to paying them off.

Once you’ve paid off the highest interest creditor first, you’ll feel better knowing that they’re not getting a penny more of your hard-earned dollars. Why give them more money than necessary?

After you pay off the first debt on your list, apply the money you were paying toward the second debt on the list. If you keep using this tactic, it won’t be long before you’re down to the very last debt on the list.

Are you working on paying off debt? What is your favorite way to prioritize which creditor to pay off first?

Student Loan Income-Driven Repayment Programs Explained

Many student loans are based on income driven repayments – that is you don’t have a set payment based on the size of you loan, but a payment amount that varies with your income. This is designed to make sure your repayments are comfortable for you and your lifestyle, but it means that calculating your required repayments can be confusing!

What is ‘Discretionary income’?

The first confusion is that repayments aren’t based on your actual income, but your discretionary income. Theoretically, this is the income you have left over after you pay for the bare necessities, but what does that actually mean? Studentaid.ed.gov defines discretionary income as:

“For Income-Based Repayment, Pay As You Earn, and loan rehabilitation, discretionary income is the difference between your income and 150 percent of the poverty guideline for your family size and state of residence. For Income-Contingent Repayment, discretionary income is the difference between your income and 100 percent of the poverty guideline for your family size and state of residence.”

Poverty guidelines are defined by the U.S. Department of Health & Human Services and vary based on your location and family size.

Repayment Plans

There are four different income-driven repayment plans, and they all come with slightly different payments terms.

REPAYE (Revised Pay As You Earn) Plan

A REPAYE loan repayment will generally be worth 10% of your discretionary income. For an undergraduate loan this will generally take 20 years to pay off, though for a graduate loan or professional studies it can take 25 years.

PAYE (Pay As You Earn) Plan

A PAYE loan will be 10% of your discretionary income, but under this plan your will never pay more than the 10-year Standard Repayment plan. This loan will also take 20 years to pay when making minimum repayments.

IBR (Income Based Repayment) Plan

Income based repayment plans have change in the last few years. If you were a new borrower on or after July 1 2014 then your repayments are 10% of your discretionary income, and will take 20 years to repay. If you had borrowed before July 1 2014, then your repayments were 15% of your income (never more than the standard 10-year repayment rates) but would take 5years longer to pay the full amount.

ICR (Income Contingent Repayment) Plan

Income contingent repayment plans have 2 options, either 20% of your discretionary income, or the same payment as a fixed 12-year loan, adjusted for your income. You will pay on whichever rate is less and it generally takes 25 years to pay your loan.

So which is best?

Great question! Tthe answer is – how long is a piece of string? Different loan types have differing requirements, and in some cases, you can only apply if you can clearly demonstrate that regular repayment plans are outside of your affordability.

Rather than jump through a million hoops and read all the eligibility criteria statements, you can crunch the numbers a student loans calculator. Enter either your loan requirements or take an estimate based on your study length and whether you are going to private or public schooling. Once you add in your income, family size and state of residence, the calculator will return your monthly repayments, total payment over the life of the loan and let you know what type of loan you are eligible for. You should note that if you have refinanced your student loans, you are not eligible for income-driven repayment plans.

 

What You Need to Do After Graduating College and Moving into the Real World

So you just got that diploma and are making your way into the ever-so-deeply-feared “real world.”

You might be excited. You might be terrified. You might be depressed. Or, you might be a weird combination of all three and a bunch of other emotions.

I was there once.

I had a mixed bag of emotions. I was pretty upset that I was leaving my “glory days” of college. You might know what I mean. Probably (okay, definitely) a little too much drinking, the freedom to do whatever you want most of the day, and unlimited entertainment all over campus.

Though I missed these things, there’s always a time to grow up and move on. Though I was able to make new friends as I moved and found plenty of things to do, there was one thing that I wasn’t too sure about – money.

I did a decent job at managing my money in college, but never really had a budget or watched it too closely.

Now I had to pay way-too-expensive rent, figure out how to start saving my money instead of blindly spending it at the bar, and learn the ins and outs of money.

I decided to put this article together to go over some basic first steps you should take to help you as you make the transition from college to the “real world.”

Step 1 – Make a Budget

As I mentioned, I never used a budget in college. I simply looked at how much money I had and tried not to blow it all too quick.

Now that I had less support from my parents and a lot more expenses, I knew it was time that I needed to start budgeting.

Though I won’t go too in-depth about budgeting here, you should at least start by writing out all of your sources of income and all of your expenses. Start out by subtracting your necessities from your income (rent, food, utilities, student loan payments, etc.), then see how much you have left for the nonessential things such as drinks on the weekend, cable, etc.

I have found that the 80/20 budget works really well for me. To learn more about this, check out my last post.

Step 2 – Start Paying Down Student Loan Debt

After you graduate you typically have 6 months before you have to start making payments on your student loans. if you have private student loans, this may not be true, and you may actually be already making payments.

Regardless of what kind of loans you have, if any, it is imperative to figure out how you are going to repay your loans. There are all kinds of repayment plans and options for those with student debt – both those doing well and those struggling.

Figure out what kind of loans you have, their balances and interest rates, and minimum monthly payments. Next, research some of the different student loan repayment options that you have.

If you have a great job and good credit score, you might want to consider refinancing your student loans to a lower interest rate.

If you are struggling to afford your payments, consider going onto an income-driven repayment plan that limits your payments to a proportion of your income.

Step 3 – Start Saving & Investing

Most people leave college with high amounts of debt and no savings. If you were somehow able to save money in college, props to you. I know I wasn’t and it wasn’t until I had a real job that I was able to start saving some money.

When you create your budget, see if you can make some room to set money aside for savings. At first, just building up some money in your bank account should be sufficient.

Once you have built up a decent amount of money, you might want to consider looking into a retirement plan such as a 401k or Roth IRA. Many employers offer these plans to employees and some even match contributions.

Final Thoughts

There are tons of things that will change after graduating college. You will make new friends, possibly lose some friends, and will experience so many new things. The one thing you shouldn’t have to stress about, though, is your money.

Do your research, make a plan, execute it, and you’ll be just fine. There are always options if you are struggling and tons of technology out there to help you along the way.

You may not know exactly what lies ahead, but that’s okay. You are still young and have time to make mistakes and learn, so go out there and start living!