So you graduated from college and have finally earned that prized piece of paper: your diploma. In addition, you have also received notice from your lender that it's time to start repaying your student loans. Needless to say, you probably weren't looking forward to that piece of paper.
Don't panic. Here are some steps to help you manage your student loan debt successfully.
1. First, take inventory of the types of student loans you borrowed.
In most cases, students will borrow a federal loan or a private loan to help finance their education. If you borrowed a federal loan under the Federal Family Education Loan (FFEL) Program before July 1, 2010, it is likely classified as a Federal Direct loan or a Federal Stafford loan. Other types of federal loans include the Perkins loan; the parent PLUS loan, which is specifically geared toward parents of undergraduate students; and the graduate PLUS loan, which is specifically geared toward graduate students.
To identify the type of federal loan(s) you borrowed, you can either consult your university's financial aid office or retrieve a list of your federal loans from the National Student Loan Data System (NSLDS). The NSLDS is the U.S. Department of Education’s central database for student aid. Additionally, the database provides a centralized, integrated view of loans and grants authorized under Title IV of the Higher Education Act of 1965, so you have a source to track your information if you fall under this category.
If you borrowed a private loan(s), reach out to your university's financial aid office to retrieve contact information for each of the loans you borrowed. Then, you can follow up with the actual lender(s) to get details on your loans. This brings us to our next step.
2. Once you've developed your inventory, compile the details of each loan.
Here is a quick list of action items you should have on hand when reaching out to lenders:
- Find out if your loan(s) are subsidized or unsubsidized.
- Mark the due date of your first payment on your calendar.
- Ask if you can set up regular, automated loan payments from your bank account.
- Discuss your repayment options (for example, a standard 10-year repayment plan, or an extended repayment plan).
- Inquire about any prepayment penalties—these are agreements between borrowers and lenders that regulate what borrowers can pay off and when.
- Talk to your lenders about the interest rates for your loans (for instance, are they variable or fixed?).
- Look into your loan deferment or forbearance options, if you find that you need to temporarily postpone making payments or reduce the amount you pay. This is also a good time to ask whether there are grace periods on your loans, and if so, to find out the length and terms of each period.
- Identify the party who is collecting your loan payment—for instance, do you have a lender or a servicer? In general, if you borrowed a federal loan, your lender is the federal government, which means you may have a servicer who was hired to collect your student loan payment. However, if you borrowed a private loan, a private entity such as a bank may be collecting your payments.
- Identify the number to call when you have questions while in repayment.
- Research borrower benefits (if available):
Here’s a little bit of background behind borrower benefits: some lenders offer ways to reduce your student loan interest rates if you perform a certain action.
For example, some lenders may reduce the interest rate on your loans if you set up automatic, monthly payments. Find out if your lender or servicer offers such provisions and take advantage of them, if you can.
Confused by these terms? Visit the Federal Student Aid website to help get some of your questions answered. Otherwise, you can contact your lender or servicer for more information.
3. Inventory? Check. Prep work? Check. Your next step is to come up with an effective strategy to pay off your loans.
Just like any other interest-bearing loan, the faster you pay off your student loans, the less interest you will pay over the life of the loans. Therefore, your first step is to determine the monthly payment for your loans that have the shortest repayment length.
Typically, the default repayment length for Federal Direct and Federal Stafford loans is 10 years. If you have a private loan, you may have chosen your repayment length when you filled out your application and signed your promissory note with the lender. In many cases, you may be stuck with your repayment length, based on when you first borrowed the loan.
However, some private lenders may lower your interest rate if you choose a shorter repayment length and/or have good credit. If your loan allows it and you can afford to make the monthly payments on your loans at the shortest repayment length, without getting into credit card debt to fund your other living expenses, then you are in good shape to repay your loans in an efficient and cost-effective manner.
However, if you cannot afford to make these payments, contact your lender and ask if you can extend the length of your repayment horizon. Think of it this way: it’s better to lower your monthly payments than to get into a situation where you cannot afford to repay the amount and end up defaulting on your loan. If you default on your loan, your credit can suffer tremendously.
For many student loan borrowers, payment flexibility is key. Most student loans do not have prepayment penalties; therefore, if you receive a windfall of money at some point in the year (for instance, a work bonus, a birthday present or a tax refund), you can pay more than the minimum monthly payment.
If you are lucky to receive such a windfall and would like to make a large payment (maybe not large enough to pay off the loan completely) on your student loan, notify your lender that you would like the funds to go toward the principal of your student loan, not toward future loan payments (some lenders will automatically use the excess to prepay future payments, if you don’t notify them).
Conversely, perhaps you're in a situation where you may not be able to afford your loan payments at the shortest repayment length, but you can afford to pay more than the amount required at their longest repayment length. In this case, consider extending the repayment length of your loans that have the lowest interest rates, while keeping the loans with the highest interest rates at the shortest repayment length possible.
Once you have repaid the loans with the highest interest rates, you can apply those monthly payments to your other monthly loan payments. In this way, you can repay your lower-interest loans in a faster period of time than you originally set up.
If you need help calculating your monthly federal loan payment based on different repayment lengths and interest rates, you should consider using the loan calculator on the Federal Student Aid website. FinAid.org also offers a calculator that may be useful if you have private loans. Keep in mind that you will probably have more flexibility in your loan repayment with your federal loans than your private loans.