Once you finish school, the real world intrudes. It’s time to find a job and get serious about what you’re going to do with the rest of your life. Oh, and there’s a good chance you’ll have to take these weighty steps while figuring out what to do with your student loans.
Student loan payments can feel overwhelming, especially when you look at the raw numbers associated with four (or more) years’ worth of college debt.
There’s a lot to know about student loan payments: How to extend your grace period, how to make sure you get credit for extra payments, and when the best time is to consolidate your loans. As you get ready to begin repaying your student loans, here’s what you need to know.
Making your first student loan payment
The good news is that, in many cases, you have a brief period of time before you have to start repaying your student debt. Your grace period gives you time to figure out your finances and set up a student loan payment plan that works for you.
How long is your grace period?
The length of your grace period depends on the type of loan you have and your servicer. In general, federal student loans come with a six-month grace period, starting from your graduation or the date when you leave school or drop below half-time enrollment. Realize that interest accrues on unsubsidized loans during your grace period (but not on subsidized loans).
There are exceptions to the federal loan grace period. For example, PLUS loans enter repayment as soon as they are disbursed. As a result, you may need to defer your payments if you aren’t prepared to begin. Your loan servicer can provide you with information on deferring your PLUS loan payments.
Another exception is the Federal Perkins Loan. Even though that program is discontinued for the time being, you might still have a loan from earlier semesters. The school where you received the loan, or your current servicer, can help you determine your grace period.
Finally, if you have private loans, you need to check with your servicer to find out if there’s a grace period for those. Some private lenders, like Citizens Bank[d], offer a six-month grace period, while others expect you to begin paying as soon as you finish school. Still others require repayment while you attend school, so you might need to ask for a deferment if you want to wait until graduation.
Changing your grace period
There are situations that can impact the length of your federal student loan grace period. Here are three circumstances that can result in changes:
- Student loan consolidation. When you consolidate during your grace period, you give up the remainder of the time you have. In general, the first payment on your consolidated loans takes place about two months after the process is completed.
- Active duty military. When you choose to serve the country as a member of the military, your grace period extends throughout your entire service, as long as you are on active duty for more than 30 days. A full six-month grace period starts when you receive your discharge.
- Returning to school. If you re-enroll in school (including grad school) for at least half-time before the end of your grace period, you can suspend your payments. The grace period starts again, providing you with the full six months, once you leave school or your enrollment drops below half-time.
Once again, private lenders may have different programs and rules related to your grace period. Double-check the rules surrounding changes to your grace period with your servicer.
Find your student loan servicer
You can’t make a payment if you don’t know where to send the money. The federal government uses other institutions, called servicers, to manage your loan payments. In most cases, your loan servicer should contact you directly, letting you know when your first payment is due and how much you owe.
If you don’t have that information for your federal student loans, you can look it up by going to the National Student Loan Data System (NSLDS). You will need a Federal Student Aid ID to make it happen. If you don’t have one, you can create one through the NSLDS.
Do you already know the name of your servicer, but aren’t sure how to contact them? Use this list, provided by the Department of Education, to find the contact information for your federal loan servicer.
If you have questions about setting up income-driven repayment, or need other information about managing your student loan payments, your loan servicer should be able to answer your questions.
For private student loans, you need to check through your mail or email correspondence to see who is servicing your loans. Try to keep information on your loan servicer in an easy-to-find place so you can access it quickly when needed.
Consolidating your student loans
Student loan payment often seems like too much because you may need to make more than one payment each month. Because of how student loans are disbursed, each year is considered a separate loan with a separate payment.
Depending on your situation, it’s possible to simplify matters through federal student loan consolidation. With this process, your loans are grouped together in a way that allows you to make only one payment each month. You can start the federal loan consolidation process by going to StudentLoans.gov.
Because you give up the remainder of your grace period, it can make sense to apply for consolidation toward the end of your six months. Carefully review your options and consider consulting with a financial professional to help you decide if consolidation is the right move.
It’s also possible to consolidate private student loans. Contact your servicer to find out how they manage the process.
Refinancing your student loans
Borrowers can consolidate private and federal student loans through refinancing. In some cases, this can lead to a lower interest rate and save you money overall.
If you have multiple private student loans from different lenders, refinancing using one lender can help you get on top of the payments. It’s often easier to keep track if you only need to make one payment and you only have one interest rate.
However, before you decide to refinance federal loans, you should consider the fact that you will lose access to income-driven repayment and Public Service Loan Forgiveness (PSLF). By refinancing federal student debt, you replace those smaller loans with a bigger private loan. Once that’s done, you lose some of the options that come with federal loans.
Weigh the benefits of a lower interest rate against the possibility that you might need income-driven repayment or PSLF later on. If you are worried about losing access to those options, then you’ll probably want to stick with federal loan consolidation.
Deciding to refinance or consolidate during your grace period can make a lot of sense, since it sets you up to have a repayment plan in place before your first payment is due. Use your grace period to research your options and decide what works best for you.
Set up your payment process
Now it’s time to set up your student loan payment process. If you still use checks, find out the payment address by contacting your servicer. However, chances are you probably want to make things easy by using automatic payments.
When you receive the information from your servicer, look for directions on setting up your account for online management. You should be able to receive your statement electronically and make payments on online. Many servicers allow you to pay through their websites, or set up autopay so the money is automatically deducted from your bank account each month.
Ask your servicer about programs that allow you to receive a discount on your APR when you sign up for autopay. While it might not be a huge savings, every little bit can help you pay less overall on your student loans.
If you decide to set up automatic payments through your bank or credit union, you will need information about your loan servicer, including the name and address, as well as your account number.
Once this information is in your financial institution’s system, you can go in once a month to pay your bill, or have your bank or credit union pay it automatically. When you use this method, understand that some financial institutions actually cut checks for the bills. Plan ahead and arrange to pay the bill five to seven days before it’s due so the check arrives on time.
How student loan payments are applied
Now that you’ve made your first student loan payment, it’s a good idea to understand how your payments are applied.
First of all, if you are in good standing, your payment goes first to the monthly interest and second toward paying down your principal. Say you have a monthly payment of $452. Your interest each month is $25. That $25 goes directly to your loan servicer, while the remaining $427 goes toward reducing your principal.
If you owe fees due to late or missed payments, those are often applied even before the interest. So if you fall behind on your debt, even less of your monthly payment will go toward principal reduction. Using the example above, if your late fees and previously accrued interest add up to $250, that will come out of your payment first. Your monthly interest is then taken out of the remaining $202, leaving only $177 to reduce your principal.
There’s an exception for income-driven repayment, however. If you are on one of those plans, the allocation favors interest before fees. However, you still have the fees taken before any amount is applied to your loan principal.
Whether your interest or fees come out first might not make a difference in the long-term if your monthly payment covers everything. If you have high enough fees to overwhelm your monthly payment, though, the fees coming out first means that you might not have enough left over for your interest. And that means the interest keeps adding up — and could be added to your loan total. Being able to take care of interest before handling fees can keep you from seeing your loan balance grow over time.
Student loan servicers automatically apply anything extra you put toward student loans to future payments. So, if decide you want to pay $100 extra each month, it’s not going to automatically reduce your principal.
In the example above, let’s say you decide to pay $552 each month instead of $452. Rather than reducing your principal, the extra hundred dollars is applied to the next payment. So next month, you only need to pay $352. If you keep paying that $552, the following month, it will look like you’ve reduced your monthly payment requirement to $252. Eventually, you’ll get to the point where you’re out in front of your payments, but you’ll be paying future interest rather than just the principal.
Setting up an autopay with your servicer based on your minimum payment can also derail your efforts to pay off your loan faster. Say you have an autopay of $452 set up with your servicer. You decide to make extra payments, and set up a separate payment for an extra $100. But again, each extra payment you make goes toward a future payment, rather than directly reducing your principal.
Over time your autopay plan with the servicer is adjusted to reflect that you’ve made future payments. The servicer might decide to reduce what it takes out in autopay each month, effectively ruining your attempts to repay your student loans early.
You can save money on interest and pay off your loan faster by putting extra money toward your payment each month. However, when you do this, you need to do it right. The best way to ensure extra money goes toward actually reducing the principal on your debt is to contact your loan servicer and specify that your additional payment shouldn’t be used for future payments.
What happens when you miss a student loan payment?
Life happens. Sometimes you aren’t able to meet your debt obligation. Unfortunately, missing a student loan payment can result in a lower credit score, and your student loans can go into default if you fall too far behind.
Ending up in default not only impacts your credit score, but it can also reduce your access to federal programs like PSLF and FHA mortgage loans. Wage garnishment and tax return withholding are two other potential consequences of federal student loan default. Private lenders can also sue for wage garnishment.
How to avoid student loan default
If you end up in a situation where you can’t make your student loan payments, contact your federal loan servicer as quickly as possible to discuss these options:
- Deferment, which allows you to delay making payments for up to three years. You can extend your deferment if needed. Your interest stops accruing on subsidized loans during deferment but continues accruing on unsubsidized loans.
- Forbearance, which can be an option if you don’t qualify for deferment, allows you to put off making payments for up to 12 months. Interest accrues on all federal loans during forbearance.
- Income-driven repayment (IDR) can help you reduce payment amounts so they are affordable. If you have a low income, IDR can provide you with a way to continue making payments without breaking your budget. Before contacting your servicer, check out our complete guide to IDR, so you are educated about which plan might work best for you. Our handy calculator can also help you identify a plan likely to fit your needs.
If you have private student loans, you should get in touch with your servicer right away to look into possible solutions. Some private lenders and servicers offer hardship relief and payment plans that can help you find a more manageable payment while you work on your financial situation.
What if you’re already in default?
If you’re already in default, it’s important to contact your servicer to work on a solution. You aren’t eligible for IDR until your federal student loans are current, but your servicer can help you create a payment plan to catch up on your loan and regain good standing. When your loans are current, ask your servicer about IDR and other affordable payment options.
How to report a problem with your servicer
If you feel like your servicer is treating you unfairly, file complaints with the Consumer Financial Protection Bureau (CFPB) and the Department of Education. It’s also possible to contact a student loan ombudsman to help you resolve problems with servicers.
In the end, understanding the student loan payment process can help you be a better advocate for yourself and stay on top of the situation.
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