We’re excited to include guest posts on our blog from interesting people and companies in the industry. This post was written by Andrew Rombach, a Content Associate for LendEDU – a website that helps consumers and recent college graduates with their finances.
If you have student loans, you don’t need to read the stories about the $1.5 trillion in outstanding student debt to know it’s a problem. You already know it’s a problem when you have to budget in a student loan payment every month.
Over half of college graduates had student debt in 2016, averaging $28,000 per borrower, according to Lendedu. As those grads start looking for jobs, many will struggle with how to repay their student debt. This could lead some graduates to make a hasty and problematic decision regarding their careers.
How can student loan debt harm your career?
Student loan debt can cause significant problems for people who are trying to move forward in their careers. Having debt can make it difficult to take advantage of opportunities like unpaid internships or entry level positions that don’t pay well. These could help you build, learn, and grow professionally, but you may not be able to pay the bills.
With that in mind, recent grads with high student loan payments are more likely to take the first job they can find according to CNBC. While it’s important to pay the bills, it’s also important to enter a career you’ll enjoy working in. Getting trapped in an unfulfilling job can be awful; the fact that the culprit is student debt makes it worse.
Furthermore, settling on your first offer can impact salary and earnings down the road. Salary raises over your career are based on your starting salary. Jumping on a low-salary job offer out of necessity can significantly reduce future earnings later on according to The Washington Post. By pushing you to make money quickly, student loan debt can harm your long term financial goals and earning potential.
Aside from leading you to an undesirable career and salary, high student debt can also cause psychological stress, which can impact your productivity. So even if you do find the right job, there’s a chance your performance could be impacted by student loans. These are just a couple ways that student debt can hurt your career prospects.
Start your career the right way
So, how can you start your career the right way and also pay down your student loans? There are plenty of ways to get started.
An effective way to kickstart your job search is to try a career accelerator. Companies such as Pathrise specialize in helping job-seekers cover all the bases when finding a job. They can help you build your resume; you can also get help with optimizing your media profiles such as LinkedIn. Additionally, participants can get networking advice and one-on-one mock interview practice. Relying on a helpful career accelerator can take out the uncertainty in a job search, and it can put you on track towards your preferred career path.
There are still other ways to get hired. If you decide to go it alone, then your best bet is to start your job search prior to graduation. Many companies are looking to recruit seniors who are graduating, and starting early is crucial to getting interview opportunities. After graduation, continue to apply for as many opportunities as possible to help score the right job. Check out this Pathrise resource about how to kickstart your job search.
It’s very important to apply for jobs consistently and keep your eyes open. It takes a lot of work to find the right job, but if you find the right career and income, it all pays off. However, this is only half the battle for a new worker with student loan debt.
Figure out your repayment strategy with your income
Let’s say you landed a job in the right career, but now you have to focus on your student loan debt. Depending on your income and monthly payments, there are several options to either reduce payments, expedite repayment, or both.
Debt avalanche method
The debt avalanche strategy is a great way to manage multiple debts and it can be done entirely through personal budgeting. Make a list of your student loan accounts with interest rates and balances. Each month, make the minimum payment on all loans except for the highest-interest student loan. Make a larger payment on this high-interest loan. When paid off, repeat the procedure with the next high-interest loan. In short, this method prioritizes the more expensive high-interest debt while maintaining payments on everything else.
This is the fastest way to get out of debt through pure personal budgeting and it will save you the most on interest costs. There are downsides to consider. You need high income to pull this off. Paying more each month sounds like a simple solution, but if the money isn’t there, it can’t be done. Furthermore, debt avalanche requires diligence and strict budgeting. The point is to devote all extra cash to making additional payments. This strategy doesn’t mix with poor budgeting, high living expenses, or a combination of the two.
Income-driven repayment programs
If you’re struggling to make your debt payments with low income, consider an income-driven repayment (IDR) program. These programs cap monthly payments at 10% to 15% of your discretionary income. After 20-25 years, the balance will be forgiven. This is a great option when starting out at an entry level salary with high student debt. It opens up room to budget early on and helps avoid default; however, an IDR plan is best suited as a temporary measure until your income increases.
This repayment method is expensive, especially if your income is too low. Making small payments on a high balance allows interest to accrue at a greater rate. This will increase the cost of the loan considerably over repayment. By the time the loan is forgiven, the final cost of the loan could be much higher compared to the 10-year standard repayment. Furthermore, IDR is only available for federal student loans – not private student loans.
Student loan refinancing
Another option is to refinance or consolidate your student loans with a private lender or bank. When you refinance your student loans, you receive a new loan to replace older loans of your choosing. You then normally will only have one, new loan with a new interest rate and new repayment term. The main goal of student loan refinancing is to get a lower interest rate or monthly payment. A lower rate can reduce monthly payments and interest capitalization, decreasing the cost of the loan over repayment.
In order to qualify, you need high income and a good-to-excellent credit score. Only the most qualified applicants can receive the lower rates that make student loan refinancing beneficial. Additionally, if you refinance federal student loans, you lose access to any federal benefits such as IDR plans.
Bi-weekly repayment schedule
Another budgeting strategy for repaying debt faster is to make half-payments every two weeks rather than one monthly full-payment. At the end of the year, you will have made 13 full payments, which is one additional payment on the year. This is a relatively simple way to pay more annually without straining your income. Keep in mind that this requires due diligence and strict budgeting. You must remember to make payments every two weeks. The biggest risk would be missing a payment out of confusion, which must be avoided.
While student loans are meant to solve the problem of paying for college, they unfortunately cause problems when it comes to career planning out of school. Oftentimes, graduates make hasty decisions regarding their careers and long-term plans in an effort to pay off their loans. Student loan repayment is important, but it should be recognized as a short-term challenge.
Finding the right job is paramount to both your professional and personal development in the long term. Furthermore, securing a proper starting salary is instrumental in future financial development as well as immediate student loan repayment. Taking the time to find the right career opportunity is incredibly worth it – even with student debt breathing down your neck. After finding the perfect job, you have plenty of options when it comes to eventually tackling your student loans.
Pathrise is a career accelerator that works with students and young professionals 1-on-1 so they can land their dream job in tech. With these tips and guidance, our fellows have seen their application responses triple and their interview performance scores double.
If you want to work with any of our advisors 1-on-1 to optimize your software engineer resume or with any other aspect of the job search, become a Pathrise fellow.