Taking out a student loan is one of the most popular and easiest ways to fund college or university. Typically, in the US, there are two types of student loan: federal loans and private student loans. Federal loans are coordinated through the US Federal Student Aid program, whereas private loans function similarly to any loan provided by a financial institution.
As a student making use of one of these loans, it is essential that you prepare yourself to pay them off in an organized way. There are many ways to pay back a student loan; this article takes you through the main things to consider when you are getting ready to do so.
1. Understanding your student loan and how much you have to repay
The student loan application period can be confusing and, during this process, you might be more focused on securing financial support from loan providers in the first instance, rather than thinking about types of loan or interest rates. Nevertheless, this information is very important and is the starting point in beginning to figure out repayment options.
Sit down as soon as you can to look at your student loan (or loans). Create a table outlining which loans are private and which ones are federal, the total amount of each loan, the interest rates, the repayment schedules, and minimum payments. Also, create an organizing system for all incoming student loan documentation, such as emails or letters posted to you.
An important part of understanding basic student loan information is to also look at loan grace periods, discussed next.
2. Grace periods
As part of the organization of your student loan information, you will likely come across loan grace periods. Grace periods refer to a set time in your student loan lifecycle between when the loan becomes eligible to be paid, and when payments begin to be processed. This varies depending on the type of loan you have.
In the US, student loans become eligible for repayment once you graduate, leave school, or drop below half-time enrolment (where you are taking on less than half the standard academic workload). Once this happens, grace periods kick in, and are as follows:
- Direct Subsidized, Direct Unsubsidized, and Federal Family Education loans have a grace period of six months.
- Perkins Loans have a grace period of nine months.
- PLUS Loans typically have no grace period at all and are eligible for payment as soon as the money is paid to you. The exception is if you’re a graduate or professional student on a PLUS Loan, in which case there’s a grace period of six months after graduation, leaving school, or dropping below half-time enrolment.
Grace periods are impacted if you are called to active-duty military service, if you return to education during a grace period, or if you refinance your loans.
3. Make a budget
By this stage, you should have all the required information you need to begin budgeting for your student loan repayment. An effective budget will take into account all outgoings (including but not limited to your student loan repayments), and any salaries from student jobs, or any investments you have. Set up your budget in a spreadsheet program such as Microsoft Excel or Google Sheets and add in formulas so you can edit and adjust your budget easily, if needed.
After drafting your budget spreadsheet, you will have an idea of how much money you will have at the end of each month. Now is a good time to consider alternative student repayment options, as this can end up saving you money in the long- or short-term.
4. Understanding your repayment options
In the US, Federal Student Loans are administered via loan servicers, who will almost always set you up under the Standard Repayment Plan. This offers fixed repayments over a ten- to thirty-year period, depending on the loan.
There are various repayment plans to choose from, some of which are available to all borrowers and some of which are open only to those who fit certain criteria (for example, the ‘Extended Repayment Plan’ is applicable only to those who owe more than $30,000 in outstanding student loans).
The first step is to review the extensive list of repayment options and figure out which one is best for you, your circumstances, and your budget. You will likely need to think about a trade-off between repaying a loan as fast as you can and handling high repayments, versus paying off a loan over a longer period, with lower repayments and potentially higher interest. In all situations, your loan servicer will help you through the process.
Private student loans might also have various repayment options, but these will be dealt with via the institution that provided the loan and might be more costly or limited in their nature. It’s important to understand these repayment options before you sign up for the loan.
5. Use a student loan calculator
Using a student loan calculator will help you visualize how much a student loan might cost you and go some way to helping you finalize your budget. StudentAid.gov offers a similar service called Loan Simulator that helps you calculate payments and works out a repayment option that’s best for you.
There are plenty of other student loan calculators out there to use, but always work on the assumption that these calculators are exactly that: an assumption, and therefore account for variances in their output in your budget.
6. Look into bi-weekly loan repayments
Bi-weekly loan repayments are an alternative to standard monthly repayments. The key difference is that by paying bi-weekly, you’re paying one extra loan installment a year. This can help you pay off your loan faster and save you money though lowering the total interest paid on the loan. Talk to your loan servicer to see if bi-weekly payments are an option, but if they are not, you can always pay these yourself as a top up.
7. Set up automatic repayments
Automatic repayments have two advantages. Firstly, you will never forget to make a payment. Doing this too often can begin to impact your credit score making securing future credit more difficult.
The second benefit to automatic repayments is that these can make your student loans cheaper. Federal loan providers and some private loan providers offer discounts on interest rates if you set up an automatic payment into your checking account. In the case of federal student loans, this discount is only 0.25% but on a loan of many thousands of dollars, this can save you a lot of money.
8. Overpaying your student loan
Student loan overpayment is a good thing to consider. It will bring down the cost of your loan through less interest payments. Even paying off an extra fifty dollars a month could shave a few years off the repayment schedule of a loan.
If you are not planning to make a regular overpayment (i.e., you want to do this from time to time because of occasional cash surpluses) then talk to your loan provider and instruct them to apply the overpayment for a certain month, otherwise this might carry on into subsequent repayment periods when you are not expecting — or can’t afford — a higher amount.
9. Use your ‘found’ money
“Found” money can refer to any momentary surplus you have from time to time. This could include a little cash gift from friends or family, tips, tax refunds, a bonus from work, or having a clear out and selling things in a yard sale. These amounts can be applied to your loan to make extra payments and reduce the amount you owe.
10. Consider student loan consolidation
Student loan consolidation is merging various student loans into one. This has the advantage of lowering or averaging out interest rates. Student loan consolidation can be applied for through US Federal Student Aid but be aware that private companies can also offer to do this. Research these companies carefully as the fees might be higher than average and you might also lose some protections that come with a federal student loan.
11. Consider refinancing
Refinancing a student loan into a private loan can help you save money through lower interest rates, although at the time of writing, federal interest rates are fluctuating due to cost-of-living adjustments.
An important consideration when refinancing a student loan is that you are essentially taking out a whole new loan that isn’t US Federal Student Aid. Therefore, you might forgo some of the rights you had before the loan was ‘privatized’. These rights could include payment relief due to financial hardship, interest freezes during periods of payment relief, and various forms of loan forgiveness options once you reach a certain period of time.
12. Investigate loan forgiveness
A last resort to paying off your student loan is looking at loan forgiveness. Remember that a student loan is still a loan, and under most circumstances, it must be repaid. Nevertheless, student loans can be forgiven, canceled, or discharged. Forgiveness or cancellation generally applies when you are working in a certain job (such as some public service jobs, like teaching). Discharge is when you cannot pay your loan due to other extenuating circumstances, such as permanent disability or the closure of the school you were making payments to.
Never assume loan forgiveness is an option. Even student debt relief for those who are working in public services is not a given. Here, the money is paid off as you earn and a remainder is forgiven, and this will not apply to every public service role in any case.
There are plenty of considerations when it comes to preparing to pay off a student loan. Ultimately, you must do what is best for you and your personal circumstances, while keeping in mind that like any loan, a student loan needs to be repaid, and it’s better to try and do this as economically as possible. If you’re not sure you want the burden of a student loan, you could always consider free education options, too.
Some keys points to consider regarding student loans are:
- Understand your loan and its payment terms.
- Make a budget.
- Work out any potential avenues to pay it off faster than the minimum amount.
Keeping these three points in mind will make you a responsible borrower and keep you on the path to being student-loan free as fast as possible.
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Are you worried about paying back your student loan? Did you find this article useful? Let us know in the comments!
This is an updated version of an article originally published on 31 January 2018.