Morehouse College commencement speaker Robert F. Smith made headlines in May of this year when he announced he would completely wipe out the student loan debt for every single member of the class of 2019. Nearly 400 graduates from Morehouse now find themselves debt-free as they begin their post-college lives, thanks to Mr. Smith’s generosity.
This can be a tough story to read if you’re one of the millions of college students graduating with student loan debt. But even without a generous billionaire benefactor to erase your debt, you can feel in control of your student loans. Here’s how you can start making your student loan payments, without feeling overwhelmed. (See also: 11 Unique Ways Millennials Are Dealing With Student Loan Debt)
Know your full balance
Typically, borrowers take out student loans on an annual basis rather than in one fell swoop. That means you may have a number of loans, possibly from various lenders. This also makes it easy to ignore your full balance, since it requires some effort on your part to calculate the total.
However, burying your head in the sand will only make repayment more difficult once your grace period ends. It’s far better to be prepared when the bills start arriving. To calculate your full balance, make sure you track down each and every loan you took out. Start by checking your federal loan balances through the National Student Loan Data System.
If you have any private loans, that can make your search a little more difficult, since there is no central database of such loans. If you’re not sure of your private loan information, contact your alma mater for the names of your private lenders. From there, you can contact each lender for your total, and find out how long your grace period is and what you will owe per month.
This is also a good time to reach out to all of your lenders with your most current contact information. Making sure they know how to reach you is the best way to stay on top of your repayment schedule. (See also: How to Manage Student Loans On a Low Income)
Use your grace period wisely
Most borrowers will have a six-month grace period after they graduate before they’re required to begin making payments. Whether you’re lucky enough to step right into a job or you’re figuring out how to make ends meet with multiple side hustles, this grace period gives you an opportunity to figure out how to handle your finances as a newly-minted adult.
Use this time to create and live within a budget. Consider setting aside the monthly amount of your student loan payment in a savings account. That will get you used to budgeting for your student loan payment and can give you a good start on an emergency fund.
Plan for your last student loan payment
Before you make your first payment, take a look at the payment schedule and calendar to see where you’ll be as of your last payment. What do you hope to have accomplished by then? Where do you want to be in your career? In your life?
Doing this mental exercise can help motivate you to move up that last loan payment. Crunch the numbers to see what sending an additional $40 per month will do to your payoff date. Keep that last payment in mind when you receive windfalls or raises, since it can bring you closer to the finish line.
Explore your repayment options
The standard repayment plan typically equals monthly payments for 10 years. This option works for the majority of borrowers and makes budgeting relatively simple.
However, if you’re graduating into tough job prospects or any other unusual circumstances, the 10-year repayment plan may not be your best option. If you have federal student loans, you can also choose a different repayment plan that may better fit with your current economic circumstances. Some of these options include:
With this plan, your payments are lower at first, and increase at regular intervals (usually every two years). This plan will still have you finish repayment within 10 years, but you’ll pay more in interest over the life of the loan.
If you owe more than $30,000, you can qualify for this fixed or graduated repayment plan which gives you up to 25 years to pay off your loans. As with the graduated repayment plan, you’ll pay more in interest with an extended plan.
Pay As You Earn (PAYE)
The PAYE plan sets your monthly payment at 10 percent of your discretionary income, but caps your monthly payment at no more than you would have paid under the standard 10-year repayment. Your payments are recalculated each year, and you need to update your income and family size each year, even if they haven’t changed. If you have an outstanding balance on your loan after 20 years of making on-time payments under this plan, the remaining balance will be forgiven.
Revised Pay As You Earn (REPAYE)
This plan is similar to the PAYE plan, except there is no cap to your monthly payment amount. That means if your income increases to the point where 10 percent of your discretionary income is greater than your monthly payment amount under standard repayment, then you’ll have to pay the higher amount. In addition, your outstanding balance is forgiven after 20 years for loans taken for undergraduate education. The balance will be forgiven after 25 years for loans you took for graduate school.
If you have a high level of debt compared to your income, you may be eligible for income-based repayment, where your monthly payment amount is set at 10 or 15 percent of your discretionary income. Your payments are recalculated each year, and your outstanding balance will be forgiven after 20 years of on-time payments.
With this plan, your monthly amount will be the lesser of 20 percent of discretionary income or the amount you would pay under a 12-year fixed repayment plan. Your payments are recalculated each year, and any outstanding balance after 25 years will be forgiven.
Low-income borrowers who have Federal Family Education Loan (FFEL) Program loans can qualify for this repayment plan. For this plan, your monthly payment is based on annual income, but your loan will be paid in full within 15 years.
While private student loans generally do not offer as many repayment options compared to federal student loans, it’s worth checking with your lenders to see what they can do for you if standard repayment will be a financial burden.
Learn about your forbearance and deferment rights
Federal student loan borrowers have a couple of other benefits that can help make repayment more doable, even in tough economic situations.
Forbearance allows borrowers to pause their student loan payments for up to 12 months at a time. During that time, their interest accrues. You can either pay the interest as it accrues, or let it be added to your balance (which means it will compound during your forbearance). You are restricted to three instances (a cumulative limit of 36 months) of forbearance throughout the life of your loan.
Deferment also allows borrowers to pause payments, although deferment is offered in six-month increments. This program is tougher to qualify for, because you are generally not responsible for paying the accrued interest during a deferment.
Both of these options should be kept in your back pocket for real financial pickles, such as unemployment, illness or disability, or new parenthood.
Research consolidation and refinancing
You can also potentially reduce your monthly student loan payment through consolidation or refinancing. Though these terms are often used interchangeably, they are different beasts.
Federal student loan consolidation allows you to consolidate multiple federal student loans into a single loan with one repayment schedule. There is no option for consolidation with private loans, unfortunately. Consolidating your federal student loans can potentially lower your monthly payment (although that will often extend your payoff date). Most likely, you won’t save money on interest, since you’re charged the weighted average interest rate of the combined loans. And consolidation can help you switch from a variable to a fixed interest rate, which may lower your overall loan costs.
Refinancing is similar to consolidation in that it puts all of your loans in a single basket. But with refinancing, you’re applying for a single private loan that will pay off your various loans, and you will adhere to the requirements of your new loan from that point forward.
The benefit of refinancing is that you can put both federal and private loans under your new loan, and you may be able to improve your interest rate or other terms. The downside is that if you refinance a federal loan, you lose access to all the federal benefits, including the various repayment options and access to deferment and forbearance.
The debt-payoff marathon
While the 2019 graduates of Morehouse College may have received a head start, all student loan borrowers can reach the day when their debt is in the rear-view mirror.
For those of us without a fairy god-billionaire, eliminating student debt is a matter of knowing your loans, your rights, your options, and your budget. A little preparation now will save you a lot of wasted energy and stress during your debt-payoff marathon.