Secrets To Managing Common Types of Debt
Millions of Americans are in debt and struggle to gain control of their finances. While the end result is that these people owe more than they currently earn, not everyone finds themselves in debt for the same reasons.
In this article, we’ll break down the following types of debt, what they are and strategies on how you can manage them in your personal life.
There are many different situations that can cause people to fall into debt. For some, this happens because they took out loans. For others, it’s because they can’t pay their credit card bills on time.
Regardless of what causes these people to be in debt, there are strategies they can use to improve their finances.
By taking time to plan, you can learn how to manage your debt effectively. The following sections outline the most common types of debt and what you can do to start paying off what you owe.
In the United States, student loans are one of the largest sources of
debt for Millennials (a name used for anyone born between the 1980s
through the mid-1990s).
Higher education is expensive in America, and most students can’t afford to study without taking out loans.
While bachelors or masters degrees can usually help students obtain more high-paying jobs in the future, these graduates are still responsible for paying back whatever they borrowed to pay for school. Over time, they’re also required to pay interest on their loan amounts.
If you have student loan debt, there are different types of loans you could have gotten. These fall into two main categories: federal or private student loans.
Federal student loans consist of the following options:
- Perkins loans– Perkins loans were issued prior to September 2017. To receive these loans, undergraduate and graduate students needed to have very high financial need. Students who received these loans borrowed money from their schools. As a result, they need to repay their universities whatever money they borrowed. Furthermore, students who received Perkins loans and who now work in certain public service fields may be eligible for loan forgiveness.
- Direct unsubsidized loans – Both graduate and undergraduate students are eligible to take out direct unsubsidized loans. There are no financial requirements they need to meet to receive this funding option. However, students who took out these loans need to be aware that they’re responsible for paying interest on their loans from the day their loans are issued to them.
- Direct subsidized loans– Unlike direct unsubsidized loans, direct subsidized loans are only available to undergraduate students with financial need. Additionally, students who take out these loans are not responsible for paying interest until they graduate. While they’re still in school, the federal government pays their loan interest.
- Federal direct PLUS loans– Graduate students and students’ parents are eligible to take out these PLUS loans. These loans usually come with higher interest rates, which will affect the amount borrowers need to pay over time.
On the other hand, private loans are loans you take out for specific purposes. Since these options aren’t regulated by the government, they likely have different terms you need to be aware of for how and when you need to pay your loan back.
Managing Your Student Loan Debt
Once you’re familiar with the type of loan you took out, you can better understand how to pay it back. However, for the student loan debt, your most effective strategy will be to make sure you make the required payment each month. Specifically, you should:
- Be aware of how much you owe.
- Know when your interest started accruing or when it will start.
- Familiarize yourself with the length of your loan.
If you bought a home, you probably needed to take out a mortgage to help you finance your purchase. Buying a house is a costly investment, which means homeowners usually have high amounts of debt they take on in order to afford their new homes.
When you took out a mortgage, it was either a conventional loan or one that was backed by the government. When figuring out how to get out of debt, you’ll first want to check and see the loan you got.
Banks and other private entities are responsible for issuing conventional loans. On the other hand, there are different types of government mortgages. These include:
- VA loans, which are insured through the U.S. Department of Veterans Affairs.
- FHA loans, which are insured through the Federal Housing Administration.
- USDA loans, which the U.S. Department of Agriculture backs.
Once you determine the type of loan you’re paying off, you’ll also need to check on the interest rate you’re responsible for paying. You either have an adjustable rate, which means your interest rate can change, or you have a fixed rate, which means your interest rate remains the same throughout the duration of your loan.
Managing Your Mortgage Debt
If you want to pay off your mortgage, it’s important to know there are different strategies available to assist you. For example, you can:
- Make your mortgage payments every two weeks instead of once a month. With this trick, you can save thousands of dollars over time. If you make half of your monthly mortgage payment every two weeks, you’ll end up making 13 months’ worth of payments every year. This will not only save you money, but it will help you pay off your loan faster.
- Refinance your mortgage. If you have a strong enough credit profile, you might be able to refinance your current mortgage loan. This allows you to get a new loan that suits your current lifestyle. Among other perks, it can help you pay off your loan sooner or reduce the amount you’re responsible for paying every month.
- Pay more toward your principal. Your loan principal refers to the amount you borrowed from a lender. The more you pay toward your principal each month, the quicker you might be able to pay off your loan. This can also reduce the overall amount you would need to pay in interest.
Credit Card Debt
Unpaid credit card bills is another common reason Americans have large amounts of debt. This happens when cardholders spend more than they earn and have no plan for how they can pay back what they charged to their credit cards.
Some people go into credit card debt because they forget to make their payments each month. However, the most common reason people go into credit card debt is because they can’t afford to pay interest on the money they borrow.
Managing Your Credit Card Debt
If you’re in credit card debt, you might worry you’ll never be able to pay off what you owe. However, there are various solutions you can take advantage of to help you regain control of your finances. For example, you can:
- Consolidate your credit card debt. If you have debt spread across various cards, you might be able to transfer all of your debt onto one low-interest credit card. This option isn’t for everyone, but it can help you if you have trouble keeping track of what you owe each month.
- Pay off high-interest cards. Overspending puts people in debt, but high-interest rates usually keep them there. To decrease the overall amount you owe, pay off any cards with high-interest fees as soon as possible.
- Consult with a financial advisor. If you need advice for your specific situation, contact a trustworthy financial advisor in your area. These professionals can help you find the best debt management solution for you.