All student loan borrowers can resolve to take steps in the new year to improve their financial situation. Whether you’re just starting to borrow for higher education or still repaying those pesky student loans, here are four New Year’s resolutions that will make your wallet happier in the long run.
1. Pay extra every month, if you can: This resolution could save you loads in interest charges over time.
Let’s say you owe $30,000 in federal student loans at the current 3.76 percent interest rate. If you paid the minimum monthly standard payment of approximately $300, you’d make payments for 10 years, including $6,000 in total interest.
But if you paid $50 extra a month, you’d save a little more than $1,000 in interest and would pay off the loan in just over eight years. You can use online student loan calculators to see how different increased monthly payments can shorten your repayment term.
Remember, there’s never a prepayment penalty for federal student loans, but check your promissory note or ask your lender if you have private student loans. Also keep in mind that most federal student loans accumulate interest while you’re in school, so consider paying the interest early to prevent capitalized interest, which accrues and is added to your principal.
[Understand how increasing your monthly student loan payment will save on interest.]
2. Know what you owe: Although this may seem obvious, studies show that college students don’t know the amount they’re borrowing, the loan terms or how much their monthly payments will be.
It’s never too early or late to get a handle on your student loan debt. Review your federal student loans through the National Student Loan Data System, the central database for federal student aid.. For private loans, check your credit report.
You can’t make a plan to pay off your debt until you know what you owe — resolve to take charge this year.
3. Resolve your default: If you haven’t made a payment on your federal student loans 270 days, you have officially defaulted. Private student loans may have shorter default time frames, so check your promissory note or contact your lender.
Even if you defaulted in 2016 or earlier, you can turn things around. The federal government allows student loan borrowers to recover from default in a few different ways: paying in full, rehabilitation or consolidation.
[Make sure to understand the consequences of student loan default.]
You may not be able to pay in full, but if you come into a monetary windfall, it’s worth it to pay off your obligation to the federal government.
The government has powerful collection tools at its disposal, including wage garnishment, tax refund seizure and the ability to garnish any federal benefit owed to you, like Social Security. It’s important to pay off the loan or at least starting a rehabilitation program within 60 days of your official default date — after that point, collection fees up to 25 percent are added to the loan balance.
To rehabilitate, you’ll need to make nine consecutive, on-time payments set at 15 percent of your disposable income. Lower monthly payments may be available, but keep in mind that once the nine months of rehabilitation payments are over, your regular monthly payment could be be much higher. The benefit of rehabilitation is that the default will be removed from your credit report.
You can also consolidate your loans out of default by arranging three consecutive payments with your current loan holder and then consolidating into the d irect loan program or agreeing to repay a consolidation loan under income-based repayment or income-contingent repayment with direct loans. However, consolidation does not remove the default from your credit report.
With both rehabilitation and consolidation, time is of the essence: Start the process within 60 days of receiving your original notice of default and you may not be charged collection costs.
[Look at this side-by-side comparison of three income-based repayment plans.]
4. Resolve to borrow responsibly: If you’re currently in school, you may be accepting the full amount of student loans offered in your financial aid award. But some of those funds may be going toward other costs beyond tuition and fees, such as room and board, textbooks and travel — these are all costs that higher education institutions regularly include when they estimate your total cost of attendance.
If you receive a refund after all your financial aid is applied to your tuition bill in 2017, consider ways you can lower your other expenses and then use those savings to pay down your loan early.
Borrowing less may be a good option if feasible, but remember that by and large education debt is one of the best investments you can make. Don’t fear the debt but borrow wisely and have a plan to pay it off.
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4 New Year’s Resolutions for Student Loan Borrowers originally appeared on usnews.com
