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’s 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. Understand 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
- 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. Review the grace periods
As part of the organization of your student loan information, you’ll likely come across loan grace periods. These refer to a set time in your student loan lifecycle between when the loan is due to be paid, and when payments are actually processed. This varies depending on the type of loan you have, extending the dates by which you can pay your installment.
In the US, student loans become eligible for repayment once you graduate, leave school or drop below half-time enrolment (where you’re taking on less than half the standard academic workload). Once this happens, grace periods kick in, whereby:
- 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’re 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.
Some useful functions to know for creating budgets include:
- The SUM function, so you can quickly calculate sums such as expenses
- The IF function, which can quickly highlight where you might go over your budget
When budgeting, always start with your essentials before listing other expenses. These essentials — which are sometimes called the “Four Walls” of budgeting — are your food, utilities, housing and transportation. If you can, it’s also a good idea to start an emergency fund. This can keep you from getting further in debt should you be met with unexpected expenses.
After drafting your budget spreadsheet, you’ll have an idea of how much money you’ll 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. Understand 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 10- to 30-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’ll 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 service called Loan Simulator that can be of use in the following scenarios:
- When you want to uncover the best student loan repayment strategy for you
- When you’re struggling to make your payments and require guidance
- When you want to simulate the effects of borrowing more money
Depending on the scenario you would like to explore, the Student Aid Loan Simulator can give you information on things like debt consolidation, avoiding loan defaults, and the impacts of suspending your payments or borrowing more.
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 through lowering the total interest paid on the loan.
As student loans writer Ryan Lane explains in a NerdWallet article: “Say you owe $30,000 in student loans with an interest rate of 7%. Over a standard 10-year repayment period, you’d make monthly payments of $348. If you instead make $174 payments every two weeks, you’d be debt-free 13 months sooner and save $1,422 in interest.”
As you can see, your interest adds up to a substantial amount over time. So, you might want to talk to your loan servicer to see if bi-weekly payments are an option; even if they’re not, you might still be able to make additional principal payments at any point.
7. Set up automatic repayments
Automatic repayments have two advantages.
Firstly, you’ll never forget to make a payment — if this happens too often, it 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 over time.
In addition, should you at one point be able to increase your payments, your auto-pay amount can easily be changed. This means you can end up paying off your student loans faster — so don’t worry about having to stick to a specific amount for the whole duration of your repayments.
8. Make principal-only payments
Your student loan consists of the following: your principal balance, which refers to the initial amount you borrowed, as well as your interest and any fees determined by the lender. When making your monthly payments, the money you give back to the lender goes towards all three components of your loan.
However, if you decide to make additional payments on top of the minimum amount you pay each month, they’ll go directly towards your principal balance, effectively reducing the amount you owe. When that happens, of course, your interest (which is proportional) also ends up going down over the life of your loan.
Consider making principal-only payments when you’re:
- Financially comfortable, meaning additional payments won’t bring chaos to your monthly budget
- Looking to pay off your loans faster
- Wanting to save on interest
9. Use your “found” money
Found money can refer to any monetary surplus you have from time to time. This could include:
- Cash gifts from friends or family
- Tax refunds
- Work bonuses
- Rebates
- Income from a side job
Although it can be tempting to use this cash to treat yourself to a new pair of sneakers, that PS5 game you’ve been eagerly awaiting or a weekend away, it might be wiser to prioritize your loan repayment over instant gratification.
As we have seen, any money that you put towards making extra payments can reduce the principal amount you owe while simultaneously saving you on interest, too.
10. Consider student loan consolidation
Student loan consolidation refers to the act of merging various student loans into one. This has the following advantages:
- It simplifies your loan repayment, as it provides you with a single monthly bill
- The Standard and Graduated plans can give you up to 30 years to repay, lowering your monthly payment
- Any variable interest rates are replaced by one fixed rate
- In some cases, you gain access to additional income-driven repayment plan options and public service loan forgiveness
While student loan consolidation can be applied for through Student Aid, 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 entails taking out a new loan to pay for your old loans. What this does, essentially, is it leaves you with one monthly payment, like consolidating your loans does. And, if the new loan you take out has a lower interest rate than the average rate of your old loans, that could save you money. So long as you don’t extend the term of the new loan, that is.
Bear in mind that you’ll need a good credit score to qualify for refinance, in some cases necessitating the presence of a cosigner.
Another important consideration when refinancing any federal student loans is that you’ll be giving up 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 cancelation generally applies when you’re working in a certain job (such as some public service jobs, like teaching). Discharge is when you can’t 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.
Final thoughts
There are plenty of considerations when it comes to figuring out how to pay back your 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 tips to bear in mind regarding student loans are:
- Understand your loan and its payment terms
- Make a budget
- Work out any potential avenues to pay it off faster if you can
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.
Are you worried about paying back your student loan? Did you find this article useful? Let us know in the comments section below!
This article is a partial update of an earlier version originally published on January 31, 2018, and contains contributions by Mike Dalley.