How to graduate debt-free

Taking on debt to pay for college can be a tough pill to swallow. But with loans, grants and other aid, you can lessen the load and limit the debt you’ll graduate with.

Why you may need debt to graduate college

Let’s put it in perspective. Debt is not necessarily a bad thing. In fact, some debt, like education debt, is considered “good debt,” which is the kind of debt that actually leads to more income or equity in the years ahead. 

Investing in a college education has historically been a good deal. Americans with college degrees typically earn higher wages over their lifetime. So the money you spend today on college will likely lead to more income earned over the years ahead. Student debt is generally considered a solid investment or “good debt.” 

Home loans are another kind of “good debt,” because residential property generally increases in value over the long term and paying back your mortgage builds equity in your home, which you’ll get back when you sell it.

In comparison, credit cards are considered “bad debt,” because they don’t deliver value, income or equity in the future and typically pay for goods and services consumed in the present, while charging high interest rates on any balance you carry. 

Student loans can also help you build a positive credit history. When you make your monthly payments on time and use the loans responsibly, you’ll build a payment record that can boost your credit score. 

How to minimize your debt when you graduate

There’s help if you look for it. Talk to your school’s financial aid counselors. Research scholarships and grants on your own. See if your current employer offers assistance. Explore if your family is willing to help out.

Check out federal student loans. You’ll find lower interest rates than most other loans – much lower than your credit cards offer – and you can use them for tuition and fees as well as college-related expenses. 

Private student loans also offer low rates, and they’re a viable option for getting through school. But they’re less flexible post-graduate, with fewer forgiveness options or modification plans than federal student loans.

While you’re in school, limit your credit card spending. Whenever you use your cards and don’t pay the full balance, you’re incurring higher interest debt than most other debt options.

However, if you use cards responsibly and pay the full balance on time every month, you could graduate with good credit, which can help you qualify for more loans and credit in the years ahead. 

How to not pay off student loans before you graduate

If you’re tempted to use your credit cards to pay off student loans, so you graduate debt-free, please think again. There are two big reasons this is a bad idea. 

First, federal student loans don’t allow for student loan payments with a credit card directly. If you were to try it, you’d have to use a third-party service and incur significant fees.

Second, you’ll pay your credit card’s high interest rate, which only adds to your debt. Instead of solving your problems, you’ll only be adding to them.

What if I can’t repay my student loan?

If you’ve already graduated and can’t make your scheduled payments, reach out to your lender. Ask about lowering or pausing your monthly payments. 

If you have a federal loan, sign up for an income-driven repayment plan. If you have a private loan, look into a modified payment plan. Not all lenders offer them, but it’s worth exploring.

Graduating debt-free is out of reach for most students. But with smart planning and making the most of available assistance, you can minimize your post-graduate debt and even start a career with healthy credit. 

Recommended Readings:

4 ways to pay off your student loans faster

How can I reduce my student loan debt?