College costs continue to go up. As borrowers wrestle with how to repay student loans, it’s a good idea to put a plan in place as soon as possible to pay off this debt, or it could get out of hand and affect your long-term financial goals. Whoever said, “You can’t put a price on a good education” probably didn’t have to deal with student loans.
The global coronavirus pandemic has meant major disruptions to lives, jobs, families and finances. Many things are returning to “normal,” including that borrowers will need to begin repaying their student loans in May, after the expiration of a temporary forbearance period for most federal student loans that began in March 2020.
If you have federal student loans, use these tips to prepare now for the resumption — or start — of student loan payments, understanding that your repayment plan should begin with a strategy. Here are nine tips to help you with repayment of federal and other types of student loans.
1. Understand What Types of Loans You Have
The first step is to get organized. If you are like many student loan borrowers, you may have a combination of both federal and private student loans. The features and benefits of each can be different, plus federal loans can be subsidized or unsubsidized and therefore affect how much interest you have to pay and when.
If you’re not sure what type of federal student loans you have, log in to the U.S. Department of Education’s National Student Loan Data System, where you can get that information. For private student loans, you can get details from the bank or lender where you obtained the loan.
When it comes to paying off your student loans, knowledge is power.
2. Pay Attention to Private Loans
For assistance as you prepare to begin repaying private student loans, direct contact with the lender can help you understand their specific policies. Every private lender has its own policy regarding loan terms, payment assistance and how they will attempt to collect from you if payments are late.
Some lenders allow borrowers to suspend their payments due to hardship, but interest and penalty fees continue to accumulate. Since this may increase a loan’s total balance over time, consider this option carefully and how it will affect your overall financial situation.
3. Find Out How Much You Owe
While you cannot afford to ignore your student loan payments, you also need to make sure monthly payment amounts are sustainable when considering the other financial obligations you have.
After finding out the total you owe in student loans, determine how much you can afford to pay each month. Once your calculations of all of your financial obligations are complete, you can better understand how much you can realistically afford to pay each month.
4. Be Proactive and Contact Your Student Loan Servicer
Whether you have a federal or private student loan, be proactive as you work to get a handle on your debt. Your lender — or servicer for federal student loans — manages the loan account, receives your payment and in most cases is the same one that disbursed loan funds to you when you were in school.
You may have multiple student loan servicers if you have more than one federal student loan. There have been numerous recent changes to federal student loan servicing, so make sure you know who your current servicers are. You should receive written communication from them, including billing statements and other notices.
5. Set a Repayment Time Frame
If you want to build a long-term plan, set a time frame for student loan payoff. If you have faced significant financial setbacks, you might be able to make your payments lower and even more manageable.
You may qualify for more flexible help if you start with monthly repayments that include the minimum and maximum repayment amounts established for the Department of Education’s Pay As You Earn plans.
6. Consider All Repayment Options
Because of past confusion and complexity about eligibility, the Department of Education recently announced an overhaul of the Public Service Loan Forgiveness program.
The recent changes clear up some of the confusion and previous limits with eligibility regarding type of loan, repayment options and loan repayment history. These changes improve the chance of reducing or eliminating student loan balances for millions of federal, state and municipal workers, as well as educators, charity workers, nonprofit hospital workers and others.
If your student loans are with private lenders or a bank, you can have multiple repayment plan options, but some of those options require substantial payments upfront. Alternatively, if you work with an educational credit counseling service, you may have an Income-Based Repayment Plan.
Under an IBR plan, your monthly payment can be spread out over 15 years and can be made in equal biweekly installments. Payments are capped at 10% of your discretionary income, which is basically any income you receive that you do not have to repay.
There are more details regarding IBR repayment. The key is to understand that you have options.
7. Prioritize Student Loan Payoff
Part of your repayment plan should be focusing first on your loans with higher interest rates. These often are more expensive and have a bigger impact on your budget. Focusing on them first will save you the most money in the long run, since paying them off faster will help save you interest costs over time.
You can begin by paying extra on the highest-interest student loan while paying the minimum amounts due on the others. Once that highest-interest loan is paid off, add the full amount you were paying on that loan to the amount you are paying on the next highest-interest student loan on your list, continuing until all are repaid.
Known as the “avalanche” method of liquidating consumer debt, this strategy has also worked well for many former students in their efforts to pay off student loans.
8. Manage Student Loan Interest
You might be able to lower your interest rate by negotiating with your lender, changing your payment amount or refinancing a student loan.
In some situations, borrowers will need to consolidate federal student loans to qualify for certain programs or loan forgiveness. Consolidation replaces multiple student loans with one loan. By doing this, you may be able to take advantage of a lower interest rate or a shorter repayment term.
9. Review Your Situation and Consider Affordability
Your financial situation might have changed over time and may change during the course of student loan repayment. Take the time to get a clear picture of your monthly income and expenses and take inventory of other debt you have — including credit cards — to understand the monthly loan payment amount that is realistic for you to manage.
This is particularly important for private student loans, which generally have stricter repayment terms and less flexibility for borrowers than federal student loans. Getting a clear sense of your current situation will let you get on with focusing on your long-term repayment goals.
The quest to manage your student debt shouldn’t end here. Follow the Student Loan Ranger blog, which offers expert guidance on all aspects of student loans.
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