I was talking to a friend of mine the other day about paying off student loans back in the States. Since I came to Japan right after I graduated, I had a 6 month window before I had to begin making monthly payments towards my student debt. To be fair, I don’t have much student debt as some of my peers, but my debt amount hovers around $22,000, making for a payment of about $275 a month.
One thing I was worried about when I came to Japan was how I could handle these payments with a measly amount in my checking account (from my student days) and getting paid in a Japanese bank account in Japanese yen. A few people I know here simply claimed they were unemployed and traveling Asia to defer the loans. This is illegal and in my opinion, immoral. Here’s a few tips I recommend to safely manage your student debt:
Get Your Money Home
Repatriating money you’ve made overseas can be a little hard, in Japan you can make a transfer of up to $7,000 pretty easily at the Japan Post Office. I did it and it worked out fine, although the rate wasn’t so good.
For my next transfer before I move home, I’ll use OzForex.com. They can make an electronic deposit into your US bank account when you place an order for currency. The nice thing is, the transfer comes from a US bank, so there shouldn’t be a foreign currency exchange fee. Additionally, there are no limits on the transfer amount, rates are the best and get better with a higher transfer amount, and you can designate separate bank accounts to transfer to, which can make bulk transfers easy. For example, a few friends and I have been talking about pooling our money for a transfer home to get a better exchange rate. In the ordering system, we can divide up the amount to each person’s bank account. The benefit of this is you’ll know exactly how much will be deposited into your bank account before you agree to the order.
Pay Off Private Loans First
I didn’t take out any private loans for my education, and there’s a reason for that. These loans usually have higher rates and could have different stipulations than the Federal loan system. Throw every dime you have at them until they’re gone. If you can, choose the graduated payment option on your federal loans and put the difference towards the private loans.
Enroll In Automatic Payment
Many of the loan providers have an option to automatically deduct your payment from your bank account. For busy people, or people who travel a lot, this helps to ensure your payments are never late if you forget or don’t have access to the internet. It also ensures you make your payment when the payment is due instead of early, allowing you to take advantage of the small time-value of money.
What I did is set up a high-interest checking or savings account with Ally Bank (I also recommend TIAA-CREF and AMEX– I’ve used them both). I put enough money in there to cover at least two months of payments – more if I’m traveling- and link that account to pay my loans. Then I only need to remember to fill the account every few months via ACH transfer from my checking account. The interest from the account helps pay my loans. If you use Ally checking/savings, you can transfer between all of your accounts really easily, get ATM fees refunded, and still earn a higher return than a typical bank.
Pay Extra Towards Your Principal Each Month
Many people say this, but fewer people do it. Put a little extra towards your principal each month. Doing so will save you a lot of money in interest. For me, investing in the stock market has produced mediocre returns on par with a high-yield CD account (granted I’m no professional). Making a payment towards your principal saves you the interest you’d pay on that amount (remember decreasing your interest cost can sometimes be a great investment!). The only investment I’d recommend before paying down your principal is a Roth IRA contribution (up to $5,000 per tax year) or a fixed-rate investment that returns more than your loan’s interest rate (LendingClub is the only place I’ve been able to do this so far).
Student debt is rumored to be the next financial crisis. With graduates unable to find jobs it makes the debt very hard to manage (student debt is one of the few debts that is not forgiveable through bankruptcy). By being smart, saying goodbye to any bad habits you developed making the debt, and making some sacrifices now, I honestly believe that not only will you be better off later on, but it will set a good example for our friends and families who help make our society and community strong and debt-free.