Ah, the joys of a grace period. Six blissful months of ignoring the fact you have to start making regular payments on student loans for a decade or two. The recent graduates entering this phase of financial arrested development would be better served using the six months to create an airtight debt repayment strategy. Follow the five steps below to do just that.
Step 1: Find your student loans.
First, you have to track down all your debts.
Tracking down federal student loans is a relatively painless process. You should start with the National Student Loan Data System. The site serves as the U.S. Department of Education’s central database.
You will need a federal student aid ID to access this site and other student loan websites sponsored by the education department. Creating a FSA ID will require your Social Security number, date of birth and name.
After you log in, you’ll see the “Aid Summary,” which provides a breakdown of all your loans, including the type, amount, date, outstanding principal and outstanding interest. You can also click on loans to find out the loan servicer, which is important information, as you’ll eventually need to contact your servicer.
Finding private loans may be a bit more cumbersome because they are not conveniently housed in a government database. But pulling a copy of your credit report from all three credit bureaus is a good place to start. You can also contact your college’s financial aid office.
Keep in mind, private student loans don’t have to offer a grace period, and you may owe soon if you have a loan with a private lender.
Step 2: Make interest-only payments.
You may want to stick your head in the sand during a grace period. After all, it is six months of not factoring debt into your budget. But instead of ignoring the problem entirely, consider making interest-only payments. Many loans accrue interest during the grace period, which then capitalizes (gets added to the principal) when you start making regular payments. You can negate some of the damage of this interest by making interest-only payments during the grace period.
Federal subsidized Stafford loans and Perkins loans will typically not accrue interest during the grace period, so any payments made on those loans will go 100 percent toward the principal debt during a grace period. That’s a great way to set yourself up for a more comfortable debt repayment.
Step 3: Learn about forgiveness programs and income-driven repayment plans.
While no one wants to be in debt, having federal loans does make it a bit easier to handle debt.
Federal student loans (except the PLUS loan and direct consolidation loans) are eligible for income-driven repayment plans. There are three types of income-driven repayment plans: Income-Based Repayment, Income-Contingent Repayment and Pay As You Earn.
The parameters of each program, and eligibility, vary — but all of them offer the opportunity to lower your payments based on your income and family size. This makes it more affordable to repay loans and prevents lenders from getting more than 10, 15 or 20 percent of your discretionary income, depending on the plan. You can also have any remaining balance on loans forgiven after 20 or 25 years.
Student loan forgiveness is another viable option for digging out of debt. You’ll still need to be making payments (often 120 consecutive payments), but there are a myriad forgiveness options available to graduates. These programs are typically linked to your profession and have stipulations on where you can work and how long you must be there before you’re eligible for forgiveness.
For example, the Teacher Loan Forgiveness Program offers up to $17,500 of debt forgiveness. A teacher must work full time for five consecutive years in an eligible elementary or secondary school that serves low-income students.
Step 4: Round up your payments.
Lenders will decide what your minimum payment is each month. But there is a small trick you can use to start digging out of the hole faster: Simply round up. If your monthly payment is $180, start paying $200.
But there is a catch.
You must tell your lender that any extra money you pay is not to be put toward future payments. Lenders don’t want you paying down your debt faster, so they have a sneaky way of applying extra money to “future payments” instead of current ones, and therefore the money is applied to the interest and not the principal balance.
Step 5: Consider refinancing to lower interest rates.
Student loan refinancing is the final option for getting a better handle on your debt. Refinancing offers the opportunity to move your debt to a lower interest rate and consolidate all your loans into one loan, thus eliminating the hassle of multiple payments.
New entrants into the student loan refinancing space, like SoFi, Earnest and CommonBond, are shaking up the traditional lenders and offer both variable and fixed rates. SoFi, for instance, offers fixed rates as low as 3.50 percent and variable as low as 1.90 percent.
Just keep in mind, if you’re refinancing federal student loans, you will no longer have access to federal perks like forgiveness and income-driven repayment programs as well as forbearance and deferment.
Six Months to Prep for Success
The grace period is designed to give new graduates breathing room between graduation and making payments. It gives you time to get a job and learn how to budget. Just be sure you’re also setting yourself up for financial success — and a shorter debt repayment — by using these steps to create a debt-free plan. Good luck!
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How to Tackle Your Student Loans Before the Grace Period Ends originally appeared on usnews.com
