How to Be Totally Prepared for Your First Student Loan Payment

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Congratulations; you’ve graduated from college. This is a major accomplishment. Of course, this accomplishment also comes with new adult responsibilities, such as preparing to make that first student loan payment.

Most student loans require payments to begin six months after graduation, but it’s never too early to get a jump start and understand what to do before that first payment is due. First, take a look at our detailed checklist for paying back student loans. Then check out these tips that focus on understanding and preparing yourself for that first student loan payment:

Look at your total loan balance
Understand your interest rate
Make room in your budget
Learn how much you can save with early payments
Pay early, pay often
Other student loan options you can consider

Look at your total loan balance

Before you make your student loan first payment, you want to know exactly what you owe. Look at the total balance of each student loan you have, both federal and private, as well as the interest rate of each to get an idea of what lies ahead for repayment.

Whether you owe a few or several thousand dollars, make sure that number is ingrained in your head. If you have not taken a look yet, you should be able to log into your student loan servicer’s website to view your loan balances and expected minimum student loan payment, along with an explanation of how and where you will pay your student loans. These numbers should also appear on your monthly loan statements.

Once you understand what you owe, you should also consider what kind of repayment plan you want to participate in. There are many, including a standard repayment plan, income-based repayment and pay as you earn plan. Whichever one you choose will depend on your individual situation.

Understand your interest rate

Now that you know how much you owe, you need to understand how much your loan will actually cost you.

Some of your student loans may be subsidized. This means they weren’t accruing interest while you were in school, because the U.S. Department of Education was paying that interest. Your interest on subsidized student loans should also not accrue during the six-month grace period after graduation.

Unsubsidized loans, on the other hand, rack up interest from the time you take out the loan. This means that, upon graduation, if you were not regularly paying your interest while in school, you’ll already owe more on the loan than what you took out.

It’s pretty simple to figure out how interest accrues on your student loans. Let’s say you have one loan for the amount of $10,000, with an interest rate of 4.28%. In this case, your monthly cost is $10,000 x (4.28%/12), or $35.66 per month.

Each month, when you make a student loan payment 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 principal, otherwise known as the original balance of $10,000.

So if you make a $120 monthly payment, the first $35.66 of your payment will go to interest. The remaining $84.34 will go toward lowering the $10,000 principal.

Next month, your interest payment will be a little bit smaller and your principal payment amount will be a little bigger. This happens each month until the loan is paid off. You can use our student loan repayment calculator to plug in your numbers and get an idea of what your monthly payment could look like.

Additionally, you should know that you may be able to get a lower interest rate by refinancing your student loans. However, in order to refinance, you’ll need to have good credit, or have access to a cosigner with good credit.

Here are some questions you should ask yourself before deciding to take this step, along with our refinancing calculator.

Make room in your budget

Next, let’s take a look at your overall budget. When planning a budget, you should first add up your total monthly income, then subtract your fixed monthly expenses such as rent and insurance. Next, subtract your other flexible, but “must-have” expenses, such as groceries and clothes. That leaves you with your discretionary budget.

Part of that budget can be allocated to things you enjoy, such as going to the movies, out to dinner or to the gym. Being in debt does not mean you shouldn’t enjoy your life at all. However, you should put the bulk of your money toward your necessary expenses and paying off your debts, and you definitely should not go into further debt due to luxury expenses.

At the very least, you need to budget for your minimum student loan payment before spending on the fun stuff. If you can budget even more for your student loans, they’ll be paid off much faster, and you’ll save a heap of money on interest.

Let’s look at how much you can save.

Learn how much you can save with early payments

Making the minimum student loan payment each month will allow you to pay off your loan by the final payment due date. However, paying a little extra each month can knock years off of your loans. When figuring out what your first payment is going to be, you should understand that you can make more than the minimum if you are able to afford it.

With the $10,000 loan example we used above, you can see by using our student loan prepayment calculator that paying just an extra $10 per month on top of the $120 minimum payment saves eight months’ time on our loan, and $178 in interest.

Make that $50 extra per month to save $645 in interest, and be debt free almost three years early. Tack on $100 extra per month to save $958 in interest and be debt-free four years early.

We will note here that you should weigh any other debt you might have before making extra payments on your student loan debt.

For example, do you have high-interest credit card debt? If you do, it would probably make more sense to concentrate on making extra payments toward that debt while continuing to make the minimum payments on your student loan debt, because student loans typically have much lower interest rates than credit cards. Federal student loans also often have higher rates than private student loans.

If student loans are your only debt, however, making extra payments toward them can make financial sense.

Pay early, pay often

Remember, just because you don’t have to make payments for the first six months after graduation doesn’t mean you have to wait either. If you have a healthy income and feel you can manage the payments right away, get started as soon as possible.

Keep in mind that, if you have unsubsidized loans, they are already accruing interest. If you aren’t making payments, your loan balance is just going to grow every month. At the minimum, try to make a payment each month to cover the interest amount so your loan balance doesn’t grow.

To make the process easier, you can set up an automatic payment toward your student loan each payday.

Other student loan options to consider

You should know as well that there are options for you if you are having financial difficulties and are not able to make loan payments at this time. Yes, it’s ideal if you can start paying off your student loans once your six-month grace period is up (or even before), but life happens. One great benefit of student loans is how flexible they can be if you are struggling financially. This provides all the more reason you should never simply ignore your student loan bill, which will have a negative effect on your credit score.

For example, you can take advantage of a deferment or forbearance if you are currently unable to make payments. This means, in times of financial hardship, you may temporarily stop making student loan payments. There are also student loan forgiveness programs you may be able to participate in.

Check out our deferment, income-based repayment and public service loan forgiveness calculators to further explore these options.

Rebecca Stropoli contributed to this report.

Published in Budgeting & Expenses, Student Loan Repayment