Do these 5 things now that the student loan grace period is over

The 6-month grace period is over—now it's time to start paying off your student loan debt. Consider these next steps before diving into your payments.

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And just like that, your 6-month grace period on your student loans is over.

Here are 5 things to consider doing next.

Your 5 next steps

There is typically a 6-month grace period until you have to repay federal student loans.

For those who graduated last spring, that means it's time to start paying your student loans.

1. Know thy student loans

Whether you have spent the last 6 months working nonstop or traveling throughout Europe, make sure you fully understand your federal student loans.

Read your Master Promissory Note, which includes the terms and conditions of your student loan.

Make sure you know your lender, student loan servicer, interest rate, and monthly payment.

2. Enroll in auto-pay

This is a no-brainer. When you enroll in auto-pay, you won't have to remember to pay your student loans each month.

Plus, many lenders offer a 0.25% interest rate discount when you sign up for auto-pay.

3. Always pay at least the minimum payment

Like any loan payment, always pay at least the minimum payment.

Otherwise, you could face additional late fees and interest costs.

Similarly, don't skip payments.

Late payments and missed payments not only cost you extra money, but also adversely affect your credit score.

4. Choose the right repayment plan

If you qualify, there are several options to consider for income-driven repayment plans for federal student loans.

If you plan to seek student loan forgiveness through the Public Service Loan Forgiveness program, for example, you will need to be enrolled in an income-driven repayment plan.

Income-driven repayment plans help reduce your monthly payment on your federal student loans. There are 4 income-driven repayment plans:

  • Pay As You Earn Repayment Plan (PAYE)
  • Revised Pay As You Earn Repayment Plan (REPAYE)
  • Income-Based Repayment Plan (IBR)
  • Income-Contingent Repayment Plan (ICR)

PAYE: Monthly payments are equal to 10% of discretionary income. The monthly payment amount is based on adjusted gross income, family size, and total eligible federal student loan balance. Direct Loans only. You must be a new borrower as of Oct. 1, 2007, and your Direct Loan must have been disbursed on or after Oct. 1, 2011.

REPAYE: Monthly payments are equal to 10% of discretionary income. The monthly payment amount is based on adjusted gross income, family size, and total eligible federal student loan balance.

IBR: Monthly payments are equal to 15% (10% if you are a new borrower) of your discretionary income. Both Direct Loans and Federal Family Education Loans (FFELs) are eligible.

ICR: Monthly payments are the lesser of (1) what you would pay on a repayment plan with a fixed monthly payment over 12 years, adjusted based on your income, or (2) 20% of your discretionary income. If you have a PLUS Loan (including Parent PLUS Loans), you can consolidate with a Direct Consolidation Loan and then you select ICR to repay the Direct Consolidation Loan.

Remember, with federal student loan repayment plans, although your monthly payment is lower, interest is still accruing.

5. Increase your student loan payments

Unlike other loans, student loans do not have a prepayment penalty.

That means you can pay off your student loans anytime with no fee.

If you have extra cash—and that may be challenging if you recently graduated—instruct your student loan servicer in writing to apply the incremental payment amount toward reducing your principal balance. Absent this instruction, your student loan servicer will apply the amount toward next month's payment (which will cost you more interest).

Whether that extra amount is $10 or $100 each month, every dollar counts.

Student loans Q&A

1. Can I consolidate my student loans to lower my interest rate?

No, your interest rate won't decrease. First, you can only consolidate federal student loans with the federal government. The result is called a Direct Consolidation Loan. The interest rate is equal to a weighted average of the interest rates on your current federal student loans, rounded up to the nearest 1/8%.

2. Can I consolidate private student loans?

Yes, you can consolidate private student loans through student loan refinancing with a private lender. The federal government does not refinance private student loans.

3. Can I refinance both private student loans and federal student loans?

Yes, you can refinance federal student loans, private student loans, or both.

4. Can I get a lower interest rate with student loan refinancing?

Yes. When you refinance student loans, you can receive a lower interest rate because lenders will evaluate your credit profile, income, and other factors, and can offer you a lower interest rate than the federal government interest rate.

This is because when you borrowed your federal student loans, you received the same interest rate as everyone else, regardless of your underlying credit profile.

If you borrowed private student loans, you probably received a higher interest rate as a student than you could receive today since you are now earning an income and have developed a credit history.

5. Why should I refinance student loans?

Typically, borrowers refinance student loans to lower their interest rate, save money on interest, and pay off their student loans faster. Other reasons may include to change their student loan servicer, receive a better customer service experience, or receive other benefits.

After you refinance, you no longer have federal student loans; instead you will have a private student loan. While you will no longer have access to forbearance or deferral through the federal government, many private lenders allow some payment flexibility should you run into financial issues.

6. How do I get approved for student loan refinancing?

To get approved for student loan refinancing, lenders may evaluate several factors, including, among others, your credit profile, income, debt-to-income ratio, and monthly cash flow.

One strategy to increase your chances for approval is to apply with a qualified co-signer with strong credit and income. A qualified cosigner can help you get approved and increase the likelihood that you will receive a lower interest rate.

Many lenders also offer co-signer release options, which allow your co-signer to be released from financial responsibility after a certain time.

7. Can I change my federal repayment plan?

Yes.

8. If I apply for Public Service Loan Forgiveness, what do I do with my private student loans?

With Public Service Loan Forgiveness, you can have your federal student loans forgiven after 120 consecutive payments and by meeting other requirements.

Since private student loans cannot be forgiven through the federal government, you can apply to refinance your private student loans.

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Article copyright 2018 by Forbes. Reprinted from the December 7, 2018, issue with permission from Forbes.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third-party provider of the reprint permission and Fidelity Investments are independent entities and are not legally affiliated.

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