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Today we have a guest post by Jacob at Dollar Diligence. Jacob is a math teacher by day and a personal finance blogger by night, and he’s constantly looking at and analyzing numbers. He shares some of his best tips and tricks at his blog, Dollar Diligence. You can find him at Dollar Diligence online and on Twitter at @DollarDiligence.
For the seven out of 10 undergrads who leave college with an average of nearly $30,000 in student loan debt, life becomes an uphill battle in the struggle to pay it down. Now imagine sitting on that debt while taking on $60,000 in new debt to attend another two or three years of school.
That’s the plight of today’s graduate students who pay an average of $140,000 more in educational costs to obtain an advanced degree. It’s not uncommon for a grad student to leave school with $95,000 or more in combined undergraduate and graduate student loan debt. That can put them way behind the starting line in as they begin the race of life.
Many grad students choose to defer the payments on their undergraduate loans until they leave grad school. In doing do, they can rack up several thousand dollars more in interest charges which continue to compound over the life of the loan.
It’s bad enough grad students leave school with a complicated patchwork of different student loans; they must then live with the burden of a higher monthly payment. Here’s the case for why grad students should start paying down their undergraduate student debt while they are in grad school.
Graduate Debt is More Expensive
It seems counterintuitive that graduate student debt is more expensive than undergraduate student debt, but, the fact of the matter it is. One reason is grad students borrow a lot more money than undergrads.
Grad students can borrow up to $20,500 a year or $138,500 in total graduate and undergraduate loans. The current federal loan rate on direct unsubsidized loans for grad students is 6% as compared to 4.45% for undergraduate loans. Grad students who need their parents to take out a Direct PLUS loan pay at a rate of 7%.
Paying down as much undergraduate debt as possible while still in school will ease the monthly payment burden after you graduate.
The Scourge of Compounding Interest Costs
While they are paying higher interest costs on their grad school loans, the unpaid interest on their undergrad loans continues to compound as a faster rate. Private student loans and unsubsidized direct loans both charge interest while you are in-school and during periods of deferment. When interest charges go unpaid, they too accrue to the loan balance, which compounds the growth of the debt.
Consider a $5,000 loan at 6% interest taken out in the first year of college. If left to accrue interest for 54 months (4 years of college plus the 6-month grace period) it will grow to $6,258, which includes $1,258 in accrued interest. If left to accrue for another 24 months of grad school, the loan balance will grow to $6,915. With interest capitalization, you will make 120 payments of $66 for a total a total payment of $8,802.
If instead, you made a minimum payment of $50 on your $6,258 loan balance starting at the beginning of grad school, the total you will pay over 10 years (120 months) is $7,965, a savings of about $837 in interest costs. And, that’s just one small loan. Instead of a monthly payment of $84, you will only pay $63 per month. Consider the impact of deferring payments on $30,000 worth of loans and what you will save by making minimum or even interest only payments while in grad school.
How to Get It Done
Of course, as you accumulate more loans during the course of your undergraduate schooling, your minimum monthly payments may increase to more than $200. Coming up with that amount of money, while meeting the demands of grad school, can be very challenging. However, the small amount of pain it might cause is nothing compared to budget-crushing pain you will feel when you are forced to delay gratification due to another 10 years of large monthly payments. Some people try to save money by taking up a job through an au pair program like Cultural Care Au Pair, that way they can gain valuable experience while earning and saving money and they don’t have to worry or struggle when it comes to debt.
Here are a few other ways graduate students have found to bring in the extra money they need to make at least the minimum payments on their undergraduate loans:
Work part-time at school: All you need are about 15 to 20 hours of work to earn the extra money needed to pay towards a loan. Check with student services about jobs in and around campus.
Tutor a student: Get paid to use your knowledge by tutoring undergraduates or high school students in the area. Tutoring usually pays better than other minimum wage jobs.
Become a freelance writer: Freelance websites such as Upwork and Guru offer thousands of projects and jobs for people with special skills, such as writing (blog posts, reports, academic papers, technical writing, etc.), graphic design, web development and social media marketing.
Get a summer job: If you can’t spare the time during the school year, get a summer job that can pay you enough for 12 months’ worth of loan payments.
Unquestionably, it can be a challenge for grad students to come up with an extra $50 to $200 a month for loan payments they could otherwise defer. Just keep in mind that, your strongest ally in the struggle against higher interest costs is time. The sooner you can begin making minimum payments on your undergraduate loans, the sooner you will gain your financial freedom.
Did you work a job in college or graduate school? If so, what was your job and did it help pay bills? Personally, I worked throughout college and graduate school. Unfortunately, I didn’t even think of putting leftover money toward paying off my student loan debt (most of my money went to food – I didn’t make much!).