My Secret to Avoiding Loan Default While Living Abroad in Spain
For many Americans, the option to move abroad feels inaccessible because of the insane amount of debt we face in student loans. While it is certainly something that you should consider, I also want to be clear that you CAN make a year or more living abroad work without breaking the bank. It is totally possible to continue to make payments on your loans while living, teaching, studying, etc in Spain. At the same time, I want to share my secret on the important technique that can help safeguard you against loan default in the case that you cannot make a payment.
Understand How Student Loans Work
First and foremost, it’s important that you understand how your loans work and what all of the different jargon means. For example, “accruing interest” is a wonderful thing when it comes to your savings account as your bank may be depositing an additional percent into your account simply for keeping your money with them. When it comes to loans, however, interest is the enemy and you are going to charged an extra percentage of what you owe each month. My personal monthly interest payment weighs in around $75 and will be more or less for you, depending on how much your current principal (the total amount you owe) is.
You should also consider the difference between subsidized and unsubsidized loans. When possible, always pay off your unsubsidized loans first as the government does not provide any help in terms of paying off the interest with these loans (and you’ve actually been accruing interest on them the entire time you’ve been in college as well). Similarly, you should look into consolidating your loans into one in order to have only one loan payment (ideally with one fixed interest rate) to worry about.
Our friend Amanda, of the Healthnut Nomad blog, is a pro when it comes to understanding this stuff—she literally managed to pay off $50,000 in student loans WHILE TRAVELING. Since she goes into it all in much better detail than I possibly can, I’m going to highly recommend you check our her blog post about this in order to understand all of the details and tips she has to offer on paying back your students loans.
Give Yourself a Safety Net
I cannot stress enough how much I admire Amanda and her commitment to getting those loans paid off ASAP. I wish I had been as proactive and relentless as she has been! Still, keep in mind that there are some things you can control—like Amanda did with her bomb budgeting—but there are also other factors to consider such as how much you will be getting paid and spending on a daily basis. Unfortunately, you will likely not find such well-paid programs here in Spain. So be sure to consider the salary, cost of living, and additional costs you’ll have to cover yourself in order to come to Spain (think visa fees, airfare, etc). It may be a little harder for you to pay off as much as Amanda has in the same amount of time. However, you CAN still make consistent payments by following her ten tips.
My personal recommendation is to PLAN to make the recommended monthly payments but to give yourself a safety net and apply for an "income driven repayment plan.” Moving abroad to Spain is going to come with its uncertainty and its ups and downs. Perhaps it’s better for your motivation to know that you HAVE to make your monthly payments or face loan default, but I personally feel that that’s a bit too much pressure to put on yourself under these circumstances (when you may have difficulty getting paid on time, accessing your bank account, or any other unexpected pitfall of live abroad). Be sure to take these four steps to optimize your banking situation before coming abroad in the first place, but you still never quite know what may go wrong when you’re living in a foreign country.
The income based repayment plan may not apply to you as it's based on how much you've earned in the last fiscal year, but unless you were working full-time you will probably qualify. As long as your last year’s income was under a certain amount ($10,000 for most loans companies) your payment each month would be reduced to $0! The beauty of this safety net is that, once approved, you can forget that you have it and go ahead paying the recommended amount each month (there is no rule saying that you can’t make payments if you have this plan or have deferred your loans!). At the same time, if you find that one month you can only afford to pay $200 instead of $300 or that you can’t make a payment at all, there will be no consequence and it will not negatively affect your credit score for the rest of your life.
Understand How Your Safety Net Works
Of course, having this peace of mind and avoiding the “need” to make a certain dollar amount of payment each month comes at a cost as well. Be aware that interest continues to accrue if you’re on an income driven repayment plan and so, if you are making no payment at all, you are adding that interest to the amount you owe which means it will take you longer (and more money) to eventually pay off your loans.
While I think this is a good technique for allowing yourself flexibility during a year or two living abroad in Spain (in which you will hopefully be making decent-sized payments anyways) it is not a plan that you should apply for year after year without careful consideration. You can check out Money Magazine's reasons why here. Do the research and talk to someone from your loan provider in order to have a clear understanding of how much interest you are accruing each month, when that interest is applied, and when the best time of the month is for you to make a payment.
Be aware that whenever you make a payment, the money will go first to paying off your interest and only goes towards the principal if all of the interest is paid off. That means that, in my personal case, making a $75 monthly payment feels as if I’m not making any progress as it only covers my interest and $0 is deducted for my total owed. Even when money is tight, do your very best to pay the interest off each month (and ideally chip away at the principal too) otherwise your loans will grow rather than decrease.
Whether you choose to tackle your loans head-on as Amanda has done or to give yourself a little wiggle room with an income-based repayment plan the important thing is to stay on top of this aspect of your finances. Ask as many questions as needed (this is a great place to start) and do as much as you can to avoid default as that can result in late fees as well as haunt you for years to come. Student loans can seem daunting and scary, but more than anything that’s because so many people don’t really understand how they work. Knowledge is power so make yourself as knowledgeable as possible before you go forth into your life of studying, teaching, traveling (or whatever) abroad!