Back in 2010, student loan debt became the biggest forms of debt in the U.S., surpassing even credit card debt! Today, student loan debt is reportedly beyond $1 trillion mark! This is something you simply cannot ignore. And, the earlier you get prepared, the better.
I graduated college in 2003, and only now am I starting to see the light at the end of the tunnel. It’s a painful journey, but you can finish paying off your student debt in a manageable way. And, if you do it the smart way – you’ll get there even faster. Here are the basics to get you started on the right foot:
1) What Kinds of Loans Do You Have?
Knowing what kinds of loans you have will greatly help guide you on knowing what to pay off first and what you can consolidate. There are generally two main types of loans (government and private), and within those, there is some further subcategorizing. Most students have a mixture of loans to cover their expenses.
Federal loans: These are loans from the government given directly to the student while he/she is enrolled in at least half-time status. While enrolled, the student doesn’t accrue interest. When he/she graduates or drops below half-time enrollment status, a 6-month grace period goes into effect before he/she needs to start paying with interest. There are two main kinds:
- Stafford loans are the most common federal education loans students receive. They can be either subsidized or unsubsidized. Subsidized loans are for undergraduate students who can demonstrate financial need and the university or school determines the amount. Unsubsidized loans are for any undergraduate or graduate student, regardless of financial need.
- Perkins loans are low-interest federal loans, administered by the school, for students who demonstrate exceptional financial need.
Private loans: These are loans taken out through banks or from credit unions – and these are the ones to avoid if possible. The interest rates are generally much higher and there aren’t usually strict limits on the percentage of interest on these loans. Therefore, these can be the hardest to pay off – and you’ll usually spend quite a bit trying to pay back these loans.
2) Consolidate Where It Benefits You
Consolidating loans will simplify your monthly payments into one single loan and can usually save you money by giving you lower interest rates and a lower monthly payment. However, consolidating offers that seem too good to be true often are, so be careful. Offers that significantly drop your monthly payment rate may require an extended loan term of 20-30 years, which means you’ll end up paying much more in interest in the long-term.
Consolidating your federal loans may take away certain rights specific to government loans, such as deferment or income-based repayment. If you think you may want to utilize this payment programs in the future, it may be best to keep your federal loans separate from one another.
Use a third-party loan calculator, like the one from Nerd Wallet, to compare different consolidation plans.
3) Come Up With a Payment Plan Amount
Here is the part where you have to look at your finances and be honest about how much you can pay off per month. This is not a number to take lightly as if you go too low, you could be paying longer than necessary, meaning you also end up paying more than necessary. If you pick a number too large, you’re not able to stick with your plan, which could result in late payments and negatively influence your credit history.
Here are the general plans available:
- Standard Repayment Plan: 10 Years
- Graduated Repayment Plan: Payments are lower first and then increase every 2 years
- Extended Repayment Plan: Up to 25 years
- Income Based Repayment (IBR): Your maximum monthly payments will be 15 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply).
- Pay As You Earn: Your maximum monthly payments will be 10 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply).
When possible, pay more than the allotted minimum per month and apply the extra towards the principle. This will effectively help you chip away at your balance.
4) Sign Up For Auto-Pay
Signing up for the automatic loan pay program with your lender has a number of benefits – and it’s wise to take advantage of this option. Firstly, lenders will usually give some discount if you choose this option. But secondly, and most importantly, it greatly reduces your own worry and concern for loan payment management. If the money is taken out automatically, you’re only responsibility is to make sure your bank account has enough each month to cover the auto payment. This minimizes your risk for missing or being late on payments.
Are you still paying off your student loans? How do you manage them?