Creating a plan to repay your student loans can help you get out of debt faster and borrow less in the long run.
It's never too early to start thinking about the amount of student debt you're taking on and how you'll repay it once you graduate. Here are some student loan repayment strategies to consider.
- Understand how your student loan debt will affect your future.
It can be hard to imagine how your student loans will impact your income and lifestyle. Will you make enough money to cover your loan payments and still have some quality of life? You can get some idea by looking at a free student loan repayment calculator like 1st Financial Bank USA's Student Loan Repayment Calculator or the U.S Department of Education's Repayment Estimator. A calculator will show your estimated loan payments, based on your interest rate and term length of the loan, and how much of your future salary will go toward those payments. It's a reality check that can prevent you from over-borrowing in college.
- Make student loan payments while you're still in school.
It might sound impossible to make loan payments while you are a starving college student. But every little bit you put toward your student loans will save money in the long-run. Unsubsidized and private loans accrue interest during college that will be added to your total loan balance, so paying down this interest as soon as possible will result in lower debt at graduation.
- Return your financial aid refunds.
After your school receives your college loan disbursement from your lender, it will deduct tuition, fees, and other costs and refund the remainder to you to use for expenses not-billed by the university (things like off-campus rent, books, and supplies.) If you have money left-over after covering these expenses, it will be tempting to spend it, but don't. Once you spend that money, you'll have to pay it back with interest. Instead, return the refund to the lender within their specified time period (usually from 30-120 days), and you won't owe a cent.
- Pay down high and variable interest loans first.
You will pay off your student loans faster if you make more than the minimum payment each month. If you have multiple college loans with different interest rates, some financial experts suggest paying more than the minimum payment on your highest and variable interest rate loans, and making the minimum payment on loans with lower, fixed interest. You'll eliminate your most expensive college loans faster and protect yourself from variable interest rate hikes that can suddenly raise your monthly payments.
- Work and save during the "grace period."
With federal college loans, you are not required to make payments until six months after you graduate. This is known as a "grace period." Save as much money as you can during this time to put toward your loans, especially if you land a job right out of college.
- Set up auto-pay.
Having your student loan payments automatically deducted from your bank account will prevent you from missing payments and incurring late fees. Even better, some loan servicers offer an interest rate deduction if you sign up for auto-pay. Federal student loans, for example, offer a 0.25% interest rate deduction.
- Choose the right student loan repayment plan.
Look at all the repayment plans available and choose one that works best for your financial goals. Federal college loans, for example, offer several repayment options:
- The standard plan sets up the same payment amount every month (with a minimum payment of $50). If you don't choose a different plan, this is the one you'll get. Students on this plan must pay off their loan in 10 years.
- The graduated plan increases your payments every two years. Students must repay this loan within 10 years.
- The extended plan sets up either a fixed or graduated payment over a period of 25 years.
- The four income-driven plans allow payments to fluctuate according to your annual income, family size, and other factors. For example, the Revised Pay as You Earn plan reduces monthly loan payments to 10 percent of discretionary income and forgives the remaining loan balance after 20-25 years of consistent payments.
You can switch to a different repayment plan anytime with no penalty. Just keep in mind that a plan with a lower monthly payment will take longer to pay off, and you'll pay more in interest.