You’re out of school and on your own for the first time. Suddenly, you’re dealing with a new job, a new living situation, and a budget to manage. The last thing you want to think about is paying off the student loans that helped get you here. More than 46 million Americans are in the same boat, with almost $1.75 trillion in total student loan debt. But don’t worry — the five tips below will get you started on the right foot.
Define Your Terms
Your student debt is probably made up of multiple loans, including both Federal and private options. Now is the perfect time to chart the basics of all your loans: how much is each loan? What’s the interest rate? What are the repayment rules? What’s the grace period before you have to start making payments? You should be able to fit all this information on one page, and that exercise will give you a clear picture of where you stand.
Choose Your Payment Path
Many loans (especially Federal ones) have several different repayment plans to choose from. The standard plan lets you pay a set amount every month, so that you pay off the loan within 10 years. You can also achieve a similar time frame with a graduated plan, the difference being that the payment starts smaller and then gradually increases until you pay off the loan. An extended plan may use fixed or graduated payments, but those payments will be smaller and you’ll pay off your loan within 25 years. And an income-based plan links your monthly payment amount to your reported income, so that you’re never paying more than you can afford. Keep in mind that the non-standard plans mean you’ll pay more interest over the life of the loan.
Automate to Save
You may already have automatic monthly payments set up for your credit card or utility bills, just so that you don’t have to worry about forgetting to pay. With student loans, there’s an added perk when you automate your monthly payment: some lenders will shave a small discount off your interest rate! Over ten years, this benefit could save you real money.
What’s true of all debt is especially true for student loan debt: pay off your highest-rate loans first. The faster you pay off the original principal of the loan, the less time high interest has to add to that amount. So whenever you have a little extra money at the end of the month, channel it towards eliminating those loans. Once the loan with the highest rate disappears, apply that money to the loan with the next-highest rate, and so on until you’ve paid everything off.
Some student loan borrowers don’t like having to keep track of multiple loans from multiple companies. Instead, they choose to consolidate all their loans into a single monthly payment through a private lender (you also have the option of consolidating multiple Federal loans into one loan through the government). If you have good credit and a good job, you might even be able to get a lower interest rate on the new loan than many of your existing loans offer. Another bonus: you might get a longer term, lowering the amount of your monthly payment. Just remember that consolidating may limit your access to non-standard payment plans.