Melissa Jean-Baptiste, 32, a first-generation American now living in New York City, did what many people do after graduating college: She made the monthly payment on her student loan debt without thinking much about it. "I said, 'OK, well, pay your bills. Do what you're supposed to do. And that's the proper way to adult,'" she recalls. "I didn't try to understand student loans" and taking on debt. "I didn't try to understand much."
Then she tried to buy a home and found out her debt-to-income ratio — that is, the share of monthly income being used to pay down debt — was too high to land a decent mortgage rate. "I was like, 'I have good credit. I pay on time. I don't understand why I can't move into this next step in adulthood,'" she says.
Jean-Baptiste is now a homeowner as well as a seasoned investor: She knows about letting your money grow. After paying off her $102,000 in student debt on a teacher's salary and becoming the co-founder and content creator of the Millennial in Debt brand, she spends her time teaching young people how to get out of debt, build wealth, and earn financial freedom.
"Honestly, the best step in learning or starting to deal with your debt," she says, is to figure out where you stand, do your research, and know "what your options are."
Jean-Baptiste had borrowed $60,000 in loans to go to school in 2013. But because she opted for an interest-only payment plan, where monthly payments just go toward interest on the loan and not toward the actual balance, that amount had ballooned into $102,000 by the time she finished paying it off in 2018.
"My monthly payment was about $200 on the interest-only plan. But because of the compound interest, with a high interest rate on a monthly basis, I was racking up more than $200 in interest," she says. "Even though I was only paying interest, I wasn't paying enough, and this is what caused the balance to go up."
To the bank, those numbers didn't work in Jean-Baptiste's favor. In addition to your credit score and financial history, mortgage lenders look at your debt-to-income ratio to determine your trustworthiness. Banks factor in your monthly debt obligations when figuring out how much they are willing to lend and tend to look at the minimum payment or 1% of the loan amount.
In essence, Jean-Baptiste says, the broker told her, "'You have too much debt. You're a liability.'"
"I'm a huge reader and Googler. So, if something like sparks my interest, I will research every aspect of that," Jean-Baptiste says. "And that's what happened in 2013," when she decided to make a change. She started educating herself on everything to do with loans.
After her conversation with the mortgage broker, Jean-Baptiste realized that switching to an interest-only plan hadn't done her any financial favors. "That was really the turning point that motivated me to start getting a hold of my finances," she says.
She called her loan provider and made a new plan for how to repay. She deciding to pay off one loan balance in full at the end of each calendar year, starting with the loan carrying the highest interest rate. She canceled subscriptions she didn't need, read up on "sinking funds" that set aside money for a particular goal, and completely overhauled her approach to spending and saving.
Jean-Baptiste is far from alone in her experience with student debt. Borrowers in the United States owe a collective $1.7 trillion, according to data published by the Federal Reserve. Those between ages 25 and 35 owe an average balance of $33,817. For 35-to-49-year-old borrowers, that number jumps to $42,373.
The Covid crisis hasn't helped. Nearly 80% of borrowers say that they don't feel financially secure enough to resume payments until at least June 2021 or later because of money issues brought on by the pandemic, per a December Student Debt Crisis poll of roughly 59,000 adults.
Video by Courtney Stith
More of a reprieve could be coming for borrowers. Earlier this year, President Joe Biden extended the payment pause for student loan borrowers until October, and a provision in the new $1.9 trillion American Rescue Plan will make any federal student loan cancellations between now and 2025 tax-free. Biden has previously said he favors forgiving $10,000 worth of student loan debt per borrower.
You don't need to wait on legislation to pass in order to take charge of your money, says Jean-Batiste. If your income has dropped or if you lost a job, it could be wise to apply for an income-based repayment plan, which can lower monthly payments. It also increases the time it will take to pay off the full loan amount, however, meaning you'll ultimately pay more in the long run.
Grabbing the bull by the horns could also simply mean being more aware of your debt versus your income, and managing your money so that you stay on top of your expenses.
"Usually our first instinct is to run when [a loan provider] is calling, like, 'I don't want to deal with this,'" says Jean-Baptiste. But taking initiative and being open to learning "really puts you ahead of the game and provides different opportunities and options for us to take control of our debt."
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