If you graduated recently, chances are you’ve started, or will soon start, paying back those loans that helped you finance the best four years of your life. Even if you’re in the midst of a grace period (which is usually between six and nine months), that time passes quickly and before you know it, you’ve got to start making monthly payments. Some days it can seem daunting, but you don’t need to have aced Econ 101 to successfully manage your loans. Just follow these tips to knock those debts out without losing your mind!
1. Know your options
Before you start handing over the minimum payment each month, do your research to see if that’s the best payment option for you. You may qualify for one of the following that will reduce your payments or even cancel your debt.
Cancellation or deference
Every type of loan is different but some federal loans, such as the Perkins loan, may qualify for cancellation if you work certain jobs such as teacher, nurse, or librarian. If you’re going back to grad school you can often defer your payments until you’re done with your second degree. No matter what your career/life path is, be sure to call your lender and see if you qualify for any sort of cancellation or deference.
If you have multiple federal loans, you can consolidate them, making repayment easier. This basically means that all your loans will be added up, and the interest rates averaged out, so that you only have one payment due each month. One thing to watch out for is that consolidating can end your grace period immediately, so don’t do this if one or more of your loans is not yet in repayment.
If you have dependents, or a very low salary, it may be beneficial for you to sign up for an income-based payment plan. This option is available on federal loans, allowing you to pay a reasonable portion of your salary each month for up to 25 years (at which point, any remaining debt is forgiven). Studentaid.ed.gov is a great resource for figuring out which repayment plan is best for you. Another way to lower your payment is by refinancing in hopes of getting a better interest rate. Most of us applied for loans before we had built up any credit, which means that we may now be eligible for better rates. Many private lenders offer this option (it is not yet available on federal loans) so check with your lender to see if you qualify. However, be aware that these new rates will not be fixed, and unlike federal loan interest rates, they could go up without warning.
Talking to your lender is always a great option, and being honest with them about your other financial responsibilities and how this particular loan fits into that can result in a fairer repayment plan. “Because I have loans from multiple lenders, the original repayment plans wanted me to pay far too much on each loan individually,” says Alexandra Patterson, who graduated with her Master of Science in Library Science from UNC-Chapel Hill in 2014. “By being upfront with the lenders about my other financial responsibilities, we were able to come up with a more reasonable repayment plan.” Additionally, it may be a good idea to negotiate your payments sooner rather than later, so you know how much to budget for loans each month.
2. Make your payments
Now that you’ve figured out which payment plan is best for you, it’s time to start paying. This might be the scariest part, but it doesn’t have to be bad!
Start paying now
Even if your first payment is not yet due, starting to pay your loans immediately is beneficial. During your grace period, if all you can spare at the end of the month is $10, put those dollars toward your loans. This will help you later if you refinance, by giving you a lower monthly payment.
Try to pay more than the minimum amount each month so you can be debt-free sooner than the typical 10-year repayment period. Paying more than required can also be handy if you fall on hard times later on. For example, if your minimum payment is $100 a month, but one month you apply $1,000 toward the loan, you’ve technically paid for ten months so your next payment isn’t due until much later. However, if you keep paying at least $100 a month after that point, you’ll be ahead of your payments and have a ten-month grace period if you do encounter tough times. Most importantly though, paying more now means that you will be paying less interest on your loans in the long run. The difference can be thousands of dollars, so remember that if it seems like those extra $100 won’t make a dent… or if you feel they would be better served “investing” in your closet. Alexandra follows this logic and generally pays $50 to $75 more than her minimum payment each month. “It seems like a lot each time I do it, but I like knowing that I will have my loan paid off a little sooner,” she says.
Focus on one loan at a time
One strategy recommended by experts is “rolling” the debt “snow ball,” which can be helpful if you have multiple loans and don’t, or can’t, consolidate. What this means is that you pay only the minimum on all your loans, including non-student loans such as car loans, except for one. You then throw all of your remaining available funds towards that one loan, paying more than the minimum each month, until you pay it off completely. When you finish paying that loan (hooray for you!), you immediately transfer all available funds to another loan, while keeping the others at their minimum payment. Some people recommend starting with the debt that has the lowest dollar amount, so it’ll get paid off quickly. Others recommend starting with the loan that has the highest interest rate, so you pay less interest overall. Either way, it can be a good strategy to aggressively pay off at least one loan at a time. This is just one method however, so do some research and find the one that works best for you!
3. Make the process even easier to manage
Now that you know how to repay your loans, here are some tips to make your life, and your payments, a lot easier.
Perhaps the only fun part of paying back student loans is the tax refund at the end of the year—which can reimburse up to $2,500 of the interest paid on your loans. When you’re living frugally to pay off loans more quickly, it can be tempting to spend your tax refund on a much-needed vacation or a pair of shoes you thought you’d never be able to afford, but it’s a good idea to use your refund check towards your loans because the more you pay now, the less you’ll have to pay overall. “Sure it would be nice to use my tax refund check for something more fun but every dollar I can put towards my loans means less I have to pay later,” says Alexandra.
Setting up a payment to be automatically taken out of your bank account at a certain time is a great way to make paying loans a little less painful. This auto-debit monthly payment is Senior Vice President & Publisher of edvisors.com Mark Kantrowitz’s, number one piece of advice for recent graduates repaying college loans. “Not only will you be less likely to be late with a payment, but most lenders will reduce your interest rate by 0.25 percent or 0.50 percent,” he says. To do this while “rolling the snowball,” use automatic payments for all loans but the one you choose to focus on; instead, pay as much as possible toward that one first.
Budgeting is important no matter what, but especially when you have to pay back debt. It’s crucial that you have enough to pay your loans, thereby avoiding default, while also being able to pay other expenses like your rent and bills. This might mean you have to turn down some fun outings and say no to shopping sprees, but it is important to start your adult life on the right financial foot. It may also be wise to evaluate the amount you’re paying in certain areas of life, like food and rent, to see if there’s anywhere you can cut back, making your loan payments fit into your budget. Finally, budgeting can help you determine how much you can afford to be automatically taken out of your account, or help you find extra money to put towards your loans. It can be hard to know where to start when setting a budget, but there are free apps like Mint and Google Doc templates to help you to set your budget.
The most important thing you can do for your loans is to pay them. Treat them as your number one financial responsibility and think of the fun you’ll have with that extra money when you’re done!