A wide variety of consumer debt sources are available, and millions of Americans contend with student loan, credit card and medical debt daily. Paying down and managing debt in an efficient, focused way—and eventually being free of it—is vital for long-term financial security.
Although a financial future free of debt obligations may seem difficult to achieve, there are simple, practical and results-focused strategies you can use to reduce these obligations and improve your financial position.
Understanding student loan debt
Data from the Federal Reserve Bank of St. Louis‡ indicates that U.S. citizens have a collective student loan debt of more than $1.6 trillion. More than 10 percent of the total U.S. population currently owes money borrowed to fund their education. The Institute for College Access & Success‡ reported the average student loan debt for 2018 graduates is $29,200.
There are a variety of different loan types, including the three forms of federal student loans and their subtypes, as well as personal loans provided by financial institutions and informal loans from family. No matter how the funds were borrowed, and the specific requirements tied to a specific loan, there are strategies for effectively paying off these loans.
Reducing your student loan debt obligations
Reducing the total amount of interest paid on your loans leads to a lower overall financial obligation. While the principal (the amount borrowed) is set in stone, the interest is not. Therefore, it’s important to pay off loans as quickly as possible, as a part of an overall budget.
One method to consider is identifying the loan with the highest interest rate, and—after making sure to provide at least the minimum payment for all other student loans—committing a larger amount of money to it each month. Be sure to communicate that the larger payment is intended to pay down the principal. Or, identify the loan with the lowest balance, committing a larger amount of money to it each month. Repeat the strategy as each loan is paid off.
You can also look into refinancing, where a lender will offer a new, often lower interest rate and payment plan based on various personal financial factors. However, be aware that paying off a federally insured student loan with private funds could result in the loss of benefits (such as potential payment deferral in the event of unemployment). Carefully research these items before refinancing with a new lender.
Managing credit card debt
International Business Times‡ notes that average credit card debt per household was $8,509 in the first quarter of 2020. Credit card debt is common across the country, so how can you reduce it?
The most practical method is to identify which card charges the highest interest rate and put any additional funds toward paying that off quickly. Before you start paying extra on any debt balance, make sure you can make at least the minimum payments on all your other credit cards.
If you are able, in addition to paying more on the highest interest card, you can also make payments larger than the minimum payment on your other credit card balances to cover your owed amount plus the interest accrued during the statement period. This will create the maximum amount of savings on interest rate charges. This approach can be difficult if the balance of the account with the highest interest rate is especially large because it may seem like it takes longer to see results.
A motivating factor in paying down and managing debt is seeing specific obligations disappear. If achieving this type of goal is important to you, consider using the snowball method. Identify your smallest debt and dedicate any extra money to paying it off. Once you’ve finished, move onto the next smallest credit card debt.
Managing debt from medical expenses
Many Americans have some form of outstanding medical debt on their credit reports, and medical debt is one of the most common causes of bankruptcy. Understanding how to manage medical debt is important, whether or not you currently have any to deal with.
Healthcare providers often have a significant degree of discretion when it comes to the exact amount charged in medical bills, as well as whether or not they share pricing information with the public. For that reason, it’s important to contest any items on your bill that you believe are too expensive or were added in error. From there, you can also negotiate payment plans with your healthcare provider. In many cases, they will be open to such arrangements, as it offers them a better chance of collecting some or all the money owed to them.
Creating a strong debt management strategy
Managing debt is an involved process that requires you to regularly review your financial situation, engage with your creditors and make the appropriate payments at the right time. To ease this process, you should strongly consider making a monthly budget that helps you track income and expenses, if you don’t have one already.
A budget lets you see where your money comes from and how it’s spent, and, most importantly, can help you pay down debts more quickly. Engaging a financial professional is another critical consideration when it comes to budgeting and debt management. Find a financial partner you trust to review your full financial picture. An objective, strategic perspective can help ensure your debt management plan is efficient and effective for you.
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