The burden of student loans makes it more difficult for college graduates to purchase a home, and politicians are presently debating how to address the issue. In the meantime, Americans must establish a strategy for repaying their student loans, which is essential to their long-term financial health.
- Developing a plan to manage your student loans is essential for your long-term financial well-being.
- Know how much you owe and the terms of your loan(s), review the grace periods, and if it makes sense, consider debt consolidation.
- As you reduce your debt, pay off the loans with the highest interest rates first.
- Reducing your principal balance and making your loan payments automatically can help you achieve your objectives more quickly.
- Investigate alternative plans, deferment, and loan forgiveness to assist you.
1. Calculate Your Total Debt
As with any form of debt, you should first determine the total amount you owe. Typically, students graduate with multiple loans, both federally and privately sponsored, having secured new financing each year they were in school.
Only when you know the total amount of your debt can you devise a strategy to pay it off, consolidate it, or possibly file for and receive forgiveness?
2. Know the Terms
As you calculate your total debt, familiarize yourself with the terms of each loan. Each loan may have a unique interest rate and repayment terms. You will need this information to formulate a repayment strategy that avoids additional interest, fees, and penalties.
3. Explore Loan Forgiveness
In extreme cases, you may be eligible to file for debt forgiveness or the cancellation of your student loan. If your school closed before you completed your degree, if you become completely and permanently disabled, or if paying the debt would result in bankruptcy, you may be eligible.
If you have worked as a teacher or in another public service occupation, you may be eligible for a less drastic but more specific form of student loan forgiveness.
4. Defer Payments
If you are currently unemployed, you can request a deferment on your student loan payments. If you have a federal student loan and are eligible for deferment, the government may not charge you interest during the deferment period. If you do not qualify for deferment, you may be able to ask your lender for forbearance, which allows you to momentarily stop making payments on your loan for a specified period. Any interest due during the forbearance period will be added to the loan’s principal balance.
5. Explore Alternative Plans
If you have a federal student loan, you may be able to negotiate an alternative repayment plan with your loan servicer. Among the options available are:
- This increases your monthly payments every two years over the course of the 10-year loan term. This plan permits modest initial payments to accommodate entry-level salaries. It also implies that you will receive raises or transition to higher-paying positions as the decade progresses.
- Extended repayment allows you to extend your loan over an extended period of time, such as 25 years instead of 10, resulting in a lower monthly payment.
- Payments are calculated based on your adjusted gross income (AGI) and cannot exceed 20% of your income for a maximum of 25 years. At the conclusion of 25 years, any remaining debt balance will be forgiven.
- Pay as you earn: This program limits your monthly payments to 10% of your monthly income for up to twenty years if you can demonstrate financial hardship. Once you’ve met the eligibility requirements, you can continue making payments under the plan even if you no longer experience hardship.
Despite the fact that these plans and other repayment options may reduce your monthly payments, you may end up paying interest for an extended period of time. In addition, none of these alternatives apply to private student loans.
6. Pay Automatically
Some private and federal student loan lenders offer an interest rate reduction if you consent to have your monthly payments automatically deducted from your checking account. Participants in the Federal Direct Loan Program, for instance, receive a 0.25 percent discount.
7. Pay Down Principal
Another common strategy for eliminating debt is to pay extra principal whenever possible. The faster the principal is reduced, the less interest is paid over the duration of the loan.
The monthly interest is calculated based on the principal, so a smaller principal will result in a smaller interest payment.
8. Use the Debt Avalanche Strategy
As with any strategy for paying off debt, it is optimal to pay off the loans with the highest interest rates first. A common strategy is to budget a certain amount above the monthly required payments, then apply the surplus to the loan with the highest interest rate.
Once that loan is paid off, apply the total monthly payment (regular payment plus overage) to the loan with the second-highest interest rate, then the loan with the third-highest interest rate, and so on until you are debt-free. This is a variation of the strategy referred to as a debt deluge.
Example of a Debt Avalanche Strategy
Suppose you have monthly student loan obligations of $300. $100 is due on a loan with a 4% interest rate, $100 is due on a loan with a 5% interest rate, and $100 is due on a loan with a 6% interest rate.
Instead of budgeting $300 for your student loans, you would budget $350 and allocate the extra $50 to the loan with an interest rate of 6% first. Once that loan is paid off, you would allocate the $150 you were previously paying toward the 5% loan, increasing your monthly payment to $250. After the 5% loan is paid off, the 4% loan would be repaid at a rate of $350 per month until all student debt is repaid in full.
9. Consider Consolidation
Once you have all the information, you may want to consider consolidating your loans. The major advantage of debt consolidation is that it frequently reduces the burden of monthly payments. It may also extend your payoff period, which is a mixed blessing because it will also result in higher interest payments.
Additionally, the interest rate on the consolidated loan may be higher than the rates on some of your existing loans. Be sure to compare loan terms prior to consolidating your debt.
Before consolidating, it is also essential to consider the following. Some federal loans include deferment options and income-based repayment plans, which are forfeited upon consolidation.
10. Review the Grace Periods
As you compile the details, you will observe that each loan has a grace period. This is the amount of time you have after graduation before you must begin paying back your loans.
Grace periods vary depending on the type of loan you have. For instance, Stafford loans have a six-month grace period, whereas Perkins loans offer a nine-month grace period before installments must begin.
How Do You Manage Student Loan Debt?
Paying more than the minimum monthly payment, adhering to a budget, consolidating or refinancing your loans, investigating loan forgiveness, and exploring various payment programs are ways to manage student loan debt.
What Happens If You Don’t Pay Your Student Loans Off?
If you don’t pay off your student loans, it does a lot of damage to your credit score. It’s just like not paying back any other loan. Your loan will be marked as overdue, sent to a collecting agency, listed on your credit report, and hurt your credit score.
This will make it harder to get a loan in the future, like a mortgage or a car loan.
If you don’t pay back your federal student loans, the government can take your wages and tax returns.
How Much Student Loan Debt Is There on Average?
In the fourth quarter of 2012, the average amount owed on federal student loans in the United States was $37,575.
The Bottom Line
Not all of these suggestions may be useful to you. But if you are having trouble repaying your student loans, there is really only one poor option: doing nothing and hoping for the best.
Your debt issue will persist, but your creditworthiness will improve. The Department of Education provides an online resource for students to evaluate repayment plans and manage their loans in order to help them choose the best repayment plan.