The Beginner’s Guide to Paying Off Student Loans

student-loan-repayment-beginners-guide

As another school year comes to a close, students are graduating in droves and getting thrust into the “real world.” With that, there is a feeling of excitement and adventure, ready to start the next chapter. But one area that is not so exciting? Paying off student loans.

Most student loan providers offer a six-month grace period before sending graduates their first bill. Yet, that time passes quicker than ever and once the bill arrives, it can be confusing.

I remember after I had graduated with my Bachelor’s, I milked the grace period, pretending that I wasn’t actually in debt while trying to get my life together.

When the first bill arrived, I wasn’t exactly sure who my lender was, how much I actually owed, and what my repayment terms were.

I was in for a nice surprise when I realized my original loan balance of $18,000 had ballooned to $23,000 by the time I graduated. Oh, right. Interest! Somehow I had blocked that from my mind, too.

If you’re a new graduate or you’re just looking to for the basics on repaying student loans, here’s your go-to guide for paying off student loans. (so you don’t have to be as ignorant as I was)

Find Out the Who, What, When and Where

When you are just getting started, you’ll want to know the who, what, when and where of your student loans.

Who Do You Owe?

This step may sound obvious, but it can be a bit confusing as your student loan lender isn’t necessarily your student loan servicer.

For example, my undergraduate loans were provided by the Department of Education but were serviced through ACS, Brazos, and Nelnet. Yes, my loans changed hands three times — another thing to keep on top of! (Pro tip: actually read your mail for important updates.)

Not sure where to start? Your first step is to go to the National Student Loan Data System (NSLDS) to see who is your loan servicer — i.e. who you will be paying. Think of loan servicers as third parties that are managing your payments.

It’s crucial to know who your student loan servicer is so you can actually pay back your student loans and keep in communication with them if you are struggling to pay back your student loans.

What Do You Owe?

As I mentioned, I thought I owed around $18,000 and didn’t even think about interest. It wasn’t until I saw the final number in black ink that it hit me. It can be shocking to find out how much you actually owe. If you’re like me, your parents helped you along and you just signed on the dotted line and set it and forget it.

If you’re like me, your parents helped you along and you just signed on the dotted line and set it and forget it.

To truly understand what you owe, you need to know:

  • How much you owe
  • How many loans you have
  • What the interest rates are

Now that you know who your loan servicer is, log into their website to get a clearer picture of what you owe. Each loan servicer is different, but you should be able to easily access your loan information, including total balances and interest rates within your account.

Another option is to sign up for Student Loan Hero to get easy access to all of this info. Our co-founder, Andy Josuweit, started Student Loan Hero after he was thrown for a loop trying to manage 16 different student loans.

Not only can you see exactly how much you owe, you can also see your repayment options and get actionable tips on paying off student loans faster.

The one thing you will need to sign up for Student Loan Hero or to find out what you owe on one of the Federal Student Aid websites is an FSA ID. In the past, you would have a Federal Student Aid PIN to access the information, but as a security update, the Department of Education is now using the FSA ID. To get started,

In the past, you would have a Federal Student Aid PIN to access the information, but as a security update, the Department of Education is now using the FSA ID. To get started, sign up here for an FSA ID or read more about the FSA ID if you need help.

When Do You Make Payments?

Now that you have verified your loan servicer and have gathered all relevant information on your loans, it’s time to figure out when you make payments. As a recent graduate, you are likely entitled to a six-month grace period, so your first payment may be months away.

When you log in to your loan servicer’s website, there should be information on when exactly you need to make a payment. I make sure I’m on top of my payments by setting up calendar reminders a few days before my payments are actually due.

Where Do I Make Payment?

Typically you can make a payment within the user portal of your loan servicer’s website. You will need to sync up your bank account to make payments. You could also go old-school and mail a check, but for easy access, you can make online payments.

Understand Your Repayment Options

When you graduate, you are automatically enrolled in the Standard Repayment Plan for your federal student loans. This is a payment plan of fixed monthly payments over the course of ten years. This means you will make equal payments for ten years until your debt is gone.

If you are carrying six-figure debt, the monthly payments under the Standard Repayment Plan would likely be four figures and difficult to pay back. Using something like the Extended Repayment Plan or Income Based Repayment Plan might be a better option. Here is a rundown of current repayment options for federal loans.

Standard Repayment Plan: This is the standard default plan for most student loans and gives borrowers 10 years to pay back their debt. This option is a shorter time frame than most of the other options, meaning you will pay less interest over time. If you can afford to, make more than the minimum payments to really save on interest and get out of debt faster.

Extended Repayment Plan: Borrowers with more than $30,000 in debt can extend their repayment up to 25 years. The payments under this plan can either be Standard (equal monthly payments) or Graduated (increasing over time). This plan is ideal for people who have lots of debt and cannot financially manage the Standard Repayment Plan.

Graduated Repayment Plan: These plans are useful for borrowers that expect their income to continue growing over time. One thing worth noting is that because less of the balance will have been paid off early on, more interest will accumulate over time than with a standard plan. Monthly payments start out low and increase every two years, during a ten-year repayment period.

Income-Based Repayment Plan: For borrowers who are experiencing financial hardship, or those with lower incomes, Income-Based Repayment might be a good fit. These plans are designed so that your minimum monthly payments are capped at 15 percent of your discretionary income.

Income-Contingent Repayment Plan: This plan calculates your monthly payment based on your salary as well as family size. Loans under this plan are also eligible for forgiveness, if unpaid after 25 years. You do not need to demonstrate financial hardship to qualify for this plan — but you will pay more in interest over time.

Pay As You Earn Plan: Borrowers that demonstrate financial hardship can have their monthly payments limited to ten percent of their discretionary income under this plan. If your loans aren’t paid off after twenty years, your loans are eligible for forgiveness.If you are banking on your loans being forgiven, one piece of news that is often missing from student loan conversations is that the current tax law states that

If you are banking on your loans being forgiven, one piece of news that is often missing from student loan conversations is that the current tax law states that forgiven loans can be considered as income, so you may be hit with a hefty tax bill.

It is important to keep in mind that these various packages apply only to federal loans. Private student loans often have fewer repayment options and less flexibility in switching between them. To discuss private student loan repayment options, talk to your lender.

Choose the Best Repayment Option For You

After you get a firm grasp of what repayment options are available to you, it’s time to choose the best one and prepare to make payments. Consider your current income, employment situation, as well as how much you can afford to put towards your debt.

It’s crucial that you do the math and understand how much you will be paying in interest over time with whichever plan you choose, but it’s also important not to jump into a plan that will stretch your finances too thin.

If you feel like you are having a difficult time managing all of your federal student loans, you may want to consider consolidating through a Direct Consolidation Loan.

Direct Loan Consolidation helps make managing payments a bit easier by creating one new loan to replace several existing federal loans. You are then left with one loan and one lender.

To apply, go to StudentLoans.gov and apply under the Repayment and Consolidation tab. It’s important to note that if you extend your repayment period through consolidation that you will pay more interest over time.

In addition, while consolidating is helpful, you can also lose some of your borrower benefits such as interest reduction and loan cancellation. If you have federal and private student loans and want to consolidate your loans, look into student loan refinancing.

Through refinancing, you may be eligible for a better interest rate, and you could save money in the long term while paying off your student loans. There are some good reasons to consider refinancing your student loans, especially if they’re high-interest and/or private student loans. However, you will be giving up your federal loan protections such as Income-Based Repayment and loan forgiveness, so make this decision carefully.

Important (and Not Obvious) Things You Should Know

Now you’ve got the basics down so you can start your student loan repayment. But first, there are several important things you should know as a borrower:

  • If at any point in time paying off student loans is difficult for you, contact your lender immediately or risk hurting your credit score. Your credit score is what lenders use to verify your creditworthiness. If you have bad credit, it will be difficult to find an apartment, get approved for a credit card, or an auto loan. Make your payments on time — and if you can’t, consider requesting deferment.
  • If you choose to defer your loans, interest will continue adding up. Before you decide to defer, understand how much the added interest it will cost you.
  • Private student loans often have higher interest rates and less flexible repayment options. If you have both federal and private student loans, consider paying off private student loans first.
  • You can save a lot of money in interest by focusing on your highest interest debt first — often referred to as the debt avalanche method. However, many people believe the debt snowball method, which focuses on paying off the smallest balances first is a great strategy because of the emotional wins.
  • Bonus! Student loan interest payments are tax deductible, so include them on your tax return.
  • If you are hoping to get your student loans forgiven through a qualifying plan, it’s crucial to note that the current tax law states that the forgiven loans can be seen as income, for which you will be taxed, which could result in a several thousand dollar tax bill. If you are pursuing Public Service Loan Forgiveness, you are exempt from paying taxes on your forgiven loans.
  • Do you have a cosigner? If so, look into cosigner release. Keeping a cosigner could mean trouble if something happens to you or your cosigner down the line.
  • It’s extremely difficult to discharge your student loans through bankruptcy.

Keep these factors in mind when making decisions about your student loans and future repayment options.

Is there anything else you want to know? Do you have any additional questions about paying off student loans? Let us help!

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