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Robert F. Smith, the commencement speaker at Morehouse College, made headlines in May by announcing he would erase the student loan debt for every member of the class of 2019. Nearly 400 graduates can now start their post-college lives debt-free, thanks to his generosity.
This story can be difficult for the millions of students graduating with debt, but even without a billionaire benefactor, you can take control of your student loans. Here’s how to start making payments without feeling overwhelmed. (See also: 11 Unique Ways Millennials Are Dealing With Student Loan Debt)
Know Your Full Balance
Most borrowers take out student loans annually, resulting in multiple loans from various lenders. This can make it easy to overlook your total debt since calculating it requires effort.
Avoiding this responsibility will only complicate repayments once your grace period ends. It’s better to be prepared when the bills arrive. To find your total balance, identify each loan you’ve taken out. Start by checking your federal loan balances through the National Student Loan Data System.
If you have private loans, tracking them can be more challenging, as there is no central database. If you’re unsure about your private loans, contact your school for the names of your lenders. Reach out to each lender to get your total balance, the length of your grace period, and the monthly payment required.
This is also a great time to update your lenders with your current contact information, ensuring they can reach you for repayment updates. (See also: How to Manage Student Loans On a Low Income)
Use Your Grace Period Wisely
Graduates typically have a six-month grace period before they must start making payments. Whether you are securing a job or managing your finances with side hustles, this period is an opportunity to establish your budget as a newly minted adult.
Consider saving the equivalent of your monthly loan payment in a savings account to get accustomed to the budget and start an emergency fund.
Plan for Your Last Student Loan Payment
Before making your first payment, examine the payment schedule to envision where you want to be by the time you make your last payment. What goals do you hope to have accomplished in your career and personal life?
This mindset can motivate you to hasten that last payment. Calculate the impact of sending an additional $40 monthly on your payoff date. Keep that final payment in mind when unexpected income arises to help you reach the finish line.
Explore Your Repayment Options
The standard repayment plan typically involves monthly payments for ten years, which works for many borrowers and simplifies budgeting.
However, if you face tough job prospects or unique circumstances, consider different repayment plans that may suit your financial situation better. Some options include:
Graduated Repayment
This plan starts with lower payments that increase at regular intervals (usually every two years). You will complete repayment within ten years but may pay more interest over time.
Extended Repayment
If your debt exceeds $30,000, you may qualify for a fixed or graduated repayment plan that extends repayment up to 25 years. Like the graduated plan, you’ll likely incur more interest with this option.
Pay As You Earn (PAYE)
The PAYE plan sets your payment at 10 percent of your discretionary income, with a cap at the standard 10-year payment. Payments are recalculated annually, and if you still owe after 20 years of on-time payments, any remaining balance will be forgiven.
Revised Pay As You Earn (REPAYE)
This plan is similar to PAYE but does not cap your monthly payment. If your income increases, you may need to pay a higher amount than the standard repayment. Outstanding balances for undergraduate loans are forgiven after 20 years, while graduate loans are forgiven after 25 years.
Income-Based Repayment
If your debt is high relative to your income, you may qualify for income-based repayment, where payments are set at 10 or 15 percent of discretionary income. Payments are recalibrated annually, and any balance remaining after 20 years of on-time payments will be forgiven.
Income-Contingent Repayment
Your monthly payment will be the lesser of 20 percent of discretionary income or the payment based on a 12-year fixed plan. Payments are recalculated each year, and outstanding balances are forgiven after 25 years.
Income-Sensitive Repayment
Low-income borrowers with Federal Family Education Loan (FFEL) Program loans may qualify for this plan, which bases monthly payments on annual income, ensuring the loan is paid in full within 15 years.
Although private student loans typically offer fewer repayment options than federal loans, it’s worth checking with your lenders to explore potential alternatives if standard repayment poses a financial burden.
Learn About Your Forbearance and Deferment Rights
Federal student loan borrowers enjoy benefits that can alleviate repayment burdens in tough economic conditions.
Forbearance permits borrowers to pause loan payments for up to 12 months, although interest accrues. You may pay this interest as it accumulates or allow it to be added to your balance, which compounds during forbearance. You can utilize forbearance a maximum of three times (for a cumulative total of 36 months) over the life of your loan.
Deferment also allows pauses in payments but is offered in six-month increments. Qualifying can be more challenging since borrowers are generally not required to pay accrued interest during deferment.
Keep both options in mind for genuine financial difficulties, such as unemployment, illness, disability, or new parenthood.
Research Consolidation and Refinancing
You might reduce your monthly student loan payment through consolidation or refinancing. Although these terms are often used interchangeably, they are distinct processes.
Federal student loan consolidation allows you to merge multiple federal loans into a single loan with one repayment schedule, potentially lowering your monthly payment (though this may extend your repayment period). Note that you usually won’t save on interest, as you’ll pay the weighted average interest rate of the combined loans. Consolidation can also convert a variable rate loan to a fixed rate, potentially lowering total costs.
Refinancing combines your loans into a new private loan, adhering to its specific requirements. The advantage of refinancing is that it allows combining federal and private loans. You may be able to secure a better interest rate or loan terms. However, if you refinance a federal loan, you forfeit access to federal benefits, including various repayment options and deferment or forbearance access.
The Debt-Payoff Marathon
While the 2019 graduates of Morehouse College received a head start, all student loan borrowers can look forward to the day their debt is settled.
For those without a billionaire benefactor, eliminating student debt is a matter of understanding your loans, rights, options, and budget. Proper preparation now will save you considerable stress as you navigate your debt-payoff journey.
