Preparing a Plan for Paying Back Student Loans

Student loans are a hot-button topic these days. As of 2019, 44.5 million borrowers owe a total of $1.5 trillion, and the average borrower graduates owing $28,650. Most people can’t repay a debt like this immediately, but don’t despair. The good news is that graduates with a four-year degree earn an average of $399 more per week than those with some college but no degree, which should make it easier to pay off those loans. With some patience and pre-planning, you should be able to pay back your loans and meet your other financial priorities at the same time.

Get Started Right Away

Many student loans don’t typically become due until six months after graduation. While this may give you a little breathing room, you don’t have to wait to get started making payments. The sooner you get started paying it back, the more momentum you’ll build, which can be instrumental in getting that loan paid off.

If you want to get an early start, consider starting to make payments while you’re still in school. Subsidized federal student loans do not accumulate interest while you’re still in school, so, dollar for dollar, that makes a payment while in school more effective than a payment once interest is accumulating. Instead of your payment being applied toward a mix of interest and principal, like it will be once interest starts accumulating, an early payment is applied entirely toward the principal on the loan. By lowering the principal before you graduate, you’ll reduce the total amount of interest you end up paying on the loan.

If you have unsubsidized loans that accrue interest while you’re in school, try to make payments that at least cover the interest while you’re still in school. This should help keep the balance owed more manageable when you graduate.

Make Payments Automatic

If you’ve ever tried to start an exercise plan, you know that bad habits can quickly defeat the best of intentions. When you wake up, you may be planning on hitting the gym after work—but after work, all you want to do is sit on the couch with a bowl of ice cream!

Build financial momentum with good habits geared toward paying off your loans. At a minimum, set a recurring calendar reminder to make your loan payments. Better yet, set aside a portion of each paycheck and set up an automatic payment from your bank account. Even better, open a separate bank account that is only for your loan payments and make automatic payments from this account to your lender.

Signing up for automatic payments isn’t just a great way to make sure your payments are on time, it can also save you money. Federal student loan servicers offer a 0.25% interest rate discount if they can automatically withdraw your payment from your bank account each month. Many private lenders offer discounts for auto-pay as well.

Simplify

Juggling multiple payments can be tricky, and no one wants to get locked into interest rates that cease to be competitive. That said, you have a couple of options for making your loan repayment simpler.

Consolidation
This is only available for federal loans, and it will not reduce the interest rate you are paying. It will, however, give you one fixed interest rate—calculated by taking the weighted average of all of your interest rates, both fixed and variable—and it allows you to eliminate the hassle of making multiple loan payments each month by consolidating them all into one monthly payment.

Consolidation is not without risk, however. If you have variable-interest loans and consolidate them into a fixed-rate loan, you could end up paying more in interest than you would’ve had you not consolidated them if interest rates fall below the fixed rate of your consolidation. Then again, you could also wind up paying less in interest if interest rates rise higher than the fixed rate of your consolidation.

If your income is low, consolidation allows you to extend the term of your loan (leading to a lower monthly payment but more interest paid over the lifetime of the loan) or even to qualify for loan forgiveness in certain fields. Consolidation is free from the federal government, so be wary of companies that try to charge you to consolidate your student loans.

Refinancing
Refinancing can lump both private and federal loans into one monthly payment and also, in some cases, lower the interest rate you are paying, particularly if prevailing interest rates have decreased since you took out your loans.

To qualify for refinancing, you generally need a stable job, a credit score of at least 690, and a history of at least a few on-time payments. If this isn’t your situation, you’ll probably need a co-signer who meets these qualifications.

Stay Flexible

Paying back student loans is a marathon, not a sprint. The Standard Repayment Plan for student loans, in which all federal loan recipients are automatically enrolled, requires you to make 10 years of equal payments.

If you can generally make this work but are experiencing a temporary pinch, know that the federal government allows borrowers to defer payments for financial hardships. But this only applies to federal loans.

If your income is too low to make your required payments, you can also enter an income-based repayment plan, which limits what you pay to a certain percentage of your income. This may sound like an obvious choice, but it’s not necessarily the case. First off, it can take you a lot longer to repay the loan. Secondly, if you’re paying too little, the loan amount might actually go up over time as interest is stacking up on top of interest. On the other hand, after 20 or 25 years, depending on when you took out the loan, the balance of the loan is eligible to be forgiven.

Ben Franklin once said, “In this world nothing can be said to be certain except death and taxes.” Had Franklin lived in today’s day and age, he may’ve also included student loan debt—at least for those seeking higher education without the means to finance it independently. But, by taking a deep breath, considering your options, and putting your education to work earning you a decent income, you should be able to deal with this debt while building toward a bright future.