Close to 70 percent of students now take on debt to get a college education. It’s no surprise that borrowers worry about paying off their student loans. Some wonder how they are even supposed to start the intimidating process. Others agonize over the best way to repay that debt as quickly as possible.
These 11 steps can help you through the whole process, from starting repayment through paying off your debts.
1. Take Stock of Your Student Loans
Like many college graduates, you may have more than one student loan. After all, you need to secure funding for each year of your education. This means you may have loans for each year you were in school. If you didn’t qualify for enough federal financial aid, you might also have loans from private banks or lenders – again, for each year of your education.
If you haven’t already done so, now is the time to make a list of all of the student loans you have. You can check the Department of Education’s National Student Loan Data System (NSLDS) for details about your federal student loans. One question you need to ask is who you must make payments to. The federal government may fund the loans, but billing and repayment services are managed by third-party loan servicers. You don’t get to choose what company will service your loan, and you may not be told that information at the time you first take out the loan. Knowing who your loan servicer is matters because you must make your payments through this company.
You also need to take stock of any private student loans you may have. There’s no single database for private student loans. You can make sure you’re accounting for all of your private loans by reviewing your loan paperwork or checking your credit report. If your bank was bought out or underwent a merger, you may find that the lender you must repay is not the same lender that originally disbursed the funding.
2. Find Out How Much You Owe
As you make your list of the loans you have to repay and who you must make payments to, don’t forget to keep a record of how much you owe. The average student loan debt amount for new graduates is now $37,172, according to financial publisher BankRate. While that seems like a lot of money – and it is – try not to get overwhelmed by sticker shock. Most students can’t afford to pay off big student loan balances all at once, but they can pay down their debt over time.
The point of finding out what you owe is so you can budget for these payments. Remember that need to repay all of your loans, not just one at a time. This means you must budget enough money for student loan repayments to cover all of these obligations. Also, keep in mind that the interest you pay will continue adding up over the time it takes you to repay the loan – and so will the total amount of money you owe.
3. Determine When Your Loans Are Due
Most federal student loans offer students a grace period. This is a period of time during which you’re not expected to make payments toward your college debt. Usually, you will have a grace period of six months after you graduate or stop attending school at least half-time, though some loans allow for longer grace periods. Private lenders often don’t offer a grace period, so don’t assume that you don’t have payments due yet – find out for sure.
If you do have a grace period, use that time to make smart financial decisions. Secure your first job out of school and start building your savings. You can make payments during your grace period if you choose to. Some federal loans continue accruing interest during your grace period. If this is the case with your loan, you may want to at least make enough in payments to cover the interest charges.
You should also find out the actual date of the month on which your loan payments will be due. Keep in mind that you will have additional bills and expenses due throughout the month, and be aware of when and how frequently you get paid. Some loan servicers may work with you to adjust your payment due date if necessary.
4. Choose a Repayment Plan That Works for You
Sometime before your first student loan payment is due, you need to understand your repayment plan. It’s important for you to know how much you have to pay per month, how long you should plan on making those payments and whether those payments or your interest rates may change.
Borrowers of federal student loans can choose from several different repayment plans. The Standard Repayment Plan requires students to pay a fixed amount of money monthly for 10 years, according to FederalStudentAid. There are also graduated payment plans, in which the payments start smaller but increase over time, and extended payment plans that allow you to stretch out your payments over as long as 25 years. Graduates who are struggling financially may prefer to choose a type of Pay as You Earn or income-based repayment plan. These plans offer more flexibility, including the option to make lower payments.
Private lenders are often less flexible with borrowers than the servicers of federal student loans are. They may not give you the chance to choose a repayment plan or to change repayment plans if you are struggling.
5. Make Your First Payment
The logistics of making your first student loan payments can vary from one loan servicer to the next. Often, borrowers have the option of making payments online, by mail or over the phone. You may need to create an online account with your loan servicer to start making payments online. Be sure to plan ahead to make sure your payment is received by the due date, especially if you intend to mail your loan servicer a check. You don’t want your payment to be late, since this could cause you to incur late fees and may even damage your credit score.
6. Enroll in an Auto-Pay Option to Save
If you have a federal student loan, signing up for automatic debit can benefit you in a number of ways. Once you’re enrolled in the auto-pay program, you won’t have to worry about late payments. You can avoid the hassle of writing out a check each month and the expense of postage. The servicers of federal student loans even decrease your interest rate by 0.25 percent when you sign up, according to FederalStudentAid.
7. Be on the Lookout for Benefits That Can Decrease Your Loans
Just because you’ve graduated college doesn’t mean you have to stop looking for funding. There are a number of benefits that might be available to you that you might not be aware of.
Employer tuition assistance is one of those benefits. Studies show that as many as 54 percent of employers offer some form of tuition assistance benefits, according to U.S. News & World Report. These programs are aimed mainly at helping employees advance their education. However, some employers may agree to making a one-time payment toward an employee’s past student loans as part of the worker’s compensation package – especially if the candidate agrees to accept a lower salary in exchange, Real Simple reported.
Borrowers in certain occupations might also qualify for loan forgiveness programs. Educators might be eligible for the Teacher Loan Forgiveness Program. If you work for a government or nonprofit organization, you may qualify for the Public Service Loan Forgiveness program.
You may have to think outside the box to come up with ways you can chip away at your student loans. For example, if you have a credit card that allows you to earn reward points, this may be an untapped method of reducing your loans. Some credit card companies allow cardholders to cash in rewards points for student loan rebates, according to U.S. News & World Report.
Just remember to make smart financial decisions when using your credit card, too. Otherwise, you’re just trading one type of debt for another.
8. Consider Consolidating Your Student Loans
If it’s difficult to keep track of all of your student loans, or if your interest rate is high, then you could benefit from consolidating your loans. Consolidating your loans simply means combining multiple loans into a single loan with a single monthly payment.
It’s free to consolidate your federal student loans, according to FederalStudentAid, although you can’t consolidate private loans in this way. If you’re thinking about loan consolidation, weigh the advantages and disadvantages carefully. Never work with a company that wants to charge you a fee for this service, because legitimate consolidation servicers from the Department of Education will help you apply for free.
9. Round Up Your Payments
Most of us already round up our bills, at least in our minds. If your monthly student loan payment is $280 – the average, according to Money 101, College in Colorado – then you probably mentally round that up to $300. What might surprise you is how much of a difference it could make if you round up your payment, too. How much would you really miss that extra $20 per month?
The fact is that $20 per month might not seem like a big deal for your current finances, but applied to your student loan payments, it could save you big-time. We’re talking about cutting years of debt and hundreds of dollars in additional interest fees. If you have a $10,000 loan, increasing your monthly payments by just $20 per month can shorten the length of a 10-year loan by nearly two years. Ultimately, you would save close to $1,000 in interest, according to loan servicer Sallie Mae. That means keeping more money in your pocket.
10. Use Extra Income to Make a Dent in the Principle Amount
If you really want to pay off your student loans quickly, you’ll want to do more than pay a little extra each month. You would be better off making additional payments and having them applied to the principle of your loan (the amount of money you actually borrowed).
A good portion of your monthly payments goes to paying interest, which means that this money isn’t actually decreasing the principle balance of the loan at all. When you make an extra payment, you can instruct your loan servicer to apply the full amount of that payment toward your principle balance, which means there’s less of a loan accruing interest in the months and years to come. Whether you can afford to make additional payments monthly or just once in a while, every little bit of extra money you pay now makes a difference.
There are plenty of ways for you to earn a little extra cash. You could get a part-time job. You can put your marketable skills to work as a freelancer. If you have a passion like art or music, you could even make some additional money selling your crafts or performing at local bars and restaurants.
Speaking of income, your income tax return is another place to look for some extra money. In many cases, taxpayers actually get a tax deduction for the amount of student loan interest they paid during the year. If you take that amount out of your tax refund and put it toward paying your student loans, it’s doing double duty – first decreasing your tax burden and then reducing the money accruing interest.
When you have reached the point of paying off your student loans, you may have to request an official payoff amount to make sure you have paid the debt completely – including any interest that has accumulated since your last payment.
11. Look at the Big Picture to Determine Your Debt Repayment Goals
Student loan debt can be financially debilitating. It can hold you back from achieving other milestones in your life or simply from becoming financially stable. However, so can other financial liabilities, like lacking an emergency savings fund or carrying credit card debt.
While it feels good to see your student loans marked “paid in full,” the smartest financial move you can make is to look at your overall financial situation, rather than focusing solely on your student loan debt. Do you have enough money saved to protect yourself in case of an emergency? What debts do you have, and how much are they costing you in interest?
It’s likely that student debt is just one of the financial challenges you need to meet. Prioritizing how much you should pay to each obligation can help you pay down all of your debt and become more financially secure in the long run.