You’ve graduated from college – congratulations! You’ve completed a major accomplishment. Before you celebrate too much, however, it is time to look at some of your new adult responsibilities, like fitting that upcoming student loan payment into your budget.
Most student loans require payments starting six months after graduation, but it is never too early to get a jump start and understand what to do when your first payment is due.
Look at your total loan balance
Before you make your first payment, you should first understand what you owe. Look at the total balance of each student loan you have to get an idea of the challenge ahead.
Whether you owe a few thousand dollars or a few hundred thousand, engrain that number in your head. That is your big financial hurdle to overcome.
If you have not taken a look yet, log into your student loan servicer’s website to view your loan balances and expected minimum student loan payment. You can also review your monthly statements to find these numbers.
When I graduated from my MBA program, I had about $40,000 in student loans to pay off. The average 2016 graduate owes $37,172.
You are not alone in battling student loan debt: 43.3 million Americans have student loans. However, you are going to be ahead of the curve when you come up with a rock-solid repayment plan before your first payment is due.
Understand your loan amortization schedule
Now that you know how much you owe, you need to understand how much that will cost you. Some of your student loans be subsidized and therefore, aren’t accruing interest yet – but that period is coming to a close. Unsubsidized loans, on the other hand, are racking up interest as we speak.
Interest will accrue on your current student loan balance according to your interest rate. Undergraduate Direct Loans currently have a student loan interest rate of 4.28%, so we will use that as an example.
If you have one loan of $10,000 at 4.28%, you can calculate the interest that accrues each month. That’s what it costs you monthly to have the outstanding loan. In this case, your monthly cost is $10,000 x (4.28%/12), or $35.66 per month.
Each month, when you make a payment, your payment is broken into two parts. First, your funds go to pay off the interest accrued during the prior month. Next, the leftover amount pays off a portion of your loan principle, or that original $10,000.
If you have a $102 monthly payment (assumed to be a brand new, 10-year loan), the first $35.66 of your payment will go to interest. The remaining $66.34 will go towards lowering the $10,000 balance.
Next month, your interest payment will be a little bit smaller and your principal payment amount will be a little bit bigger. This happens each month until the loan is paid off.
Make room in your budget
Next, let’s take a look at your overall budget. There are lots of ways to budget, so pick the one that works best for you.
Add up your total monthly income (hopefully you have a job or will shortly after graduating), then subtract your fixed monthly expenses such as rent and insurance. Next, subtract your other flexible but “must-have” expenses like groceries. That leaves you with your discretionary budget.
Part of that budget should be allocated to things you enjoy, such as going to the movies, bars, or traveling, but don’t put too much into fun stuff while still paying your student loans.
At the very least, you need to budget for your minimum payment before spending on fun stuff. If you can budget even more for your student loans, they’ll be paid off much faster and save you a whole heap of money on interest.
Let’s look at how much you can save.
How much you can save from early payments
Using the student loan prepayment calculator below, you can see that making the minimum payment each month will let you pay off your loan completely on the final payment due date.
However, paying a little extra each month can knock years off of your loans. I made huge extra payments and paid off my student loans in two years.
The calculator above didn’t exist yet when I paid off my loans, but you are lucky and can plug in numbers to see just how quickly you can get out of debt. With the $10,000 loan example above, paying an extra $10 per month on top of the $102 minimum payment saves $249 in interest and the loan would be paid off three months early.
Make that $50 extra per month to save $892 in interest and 44 months early. Tack on another $100 extra per month to save $1,287 in interest, enough for a plane ticket to Europe, and pay off the loan in half the time. You get the point.
Pay early, pay often
Remember, just because you don’t have to make payments for the first six months doesn’t mean you have to wait either. If you have income, get started on those payments as soon as possible.
Accruing interest without making payments means your loans are just going to grow every month. At the minimum, try to make a payment each month to cover the interest amount so your loan doesn’t grow any more.
When I was paying off my student loans, I setup an automatic payment each payday. Rather than wait for my bill to come, I cut my minimum payment in two and paid that each time I had a paycheck come in so I didn’t ever feel like I was living without the extra income.
Over time, I increased that payment every payday until I was making a full payment twice each month. Then, every time I had a big windfall such as a tax refund or bonus at work, I put that entire amount into my loans. Fast forward to 736 days after graduation and I was student loan debt free.
So what are you waiting for? Go make that first payment already!
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