If you’re graduating from college today, you’re in a completely different situation than your parents were. The cost of college tuition and fees has increase over 1000 percent since the late 1970’s. During that same period, medical expenses climbed just over 600 percent and the cost of food has increase just under 250 percent. So college tuition increases have far outpaced the costs of other goods. The average graduate today owes around $29,000 in debt. That’s a hefty sum, and knowing how to handle that sort of debt burden can be extremely difficult. Here are some tips for knowing how to deal with your student loans in the smartest way possible.
1. Account for your payments in your budget. Before making any major purchases, make sure that you account for the percentage of your budget that will be taken up by loan payments. Many financial advisors recommend a 50-30-20 rule, meaning that – after taxes – you would spend 50 percent of each check on necessities, 30 percent on luxuries, and 20 percent on debt and savings. Of course, in some income brackets that just isn’t possible, especially depending on the cost of living in your area. However, that’s the goal and it’s good to aim for it.
2. Learn about your grace period. After leaving school, you have a grace period before you have to begin repaying your loans. You should know exactly what your grace period is and exactly when it starts. The length of the grace period varies based on the type of loan. For instance, federal Stafford loans allow a six-month grace period; federal Perkins loans allow a nine-month grace period; and federal PLUS loan grace period vary based on when they were issue. Private student loan grace periods vary, so make sure that you contact your lender or reread your paperwork around the time that you graduate so that you know exactly how long you have. If you already have a job and can make payments, though, you may as well skip the grace period to get your payments done sooner.
3. Understand your repayment options. There are various repayment options for student loans. Federal student loan repayments are automatically based on a 10-year plan. However, if you can’t get a sufficiently high-paying job to afford that or if your cost of living is just too high, you can opt for a longer repayment plan. That will make your monthly payments lower but the total cost of repayments will be higher because the total interest payments will be higher.
4. Make extra payments whenever possible. When you have the opportunity, you should pay extra toward the principal on your debt. Paying it off sooner will mean that you have less total interest that you have to pay. However, if you qualify for Public Service Loan Forgiveness then you can be forgiven the remainder of your loan after making 120 qualifying payments – which usually means 10 years of payments.
5. Learn about deferments and forbearance. If you find that you aren’t able to make your monthly loan payments for whatever reason, you may need to look into deferment and forbearance. In either case, you are permitted not to make loan payments for a certain period of time, but in the case of a deferment you may not be charged interest during that time while in the case of a forbearance you will certainly be charged interest. Peace Corps service, military service, inability to find a job for a certain period of time, and certain qualifying types of jobs can allow you to get a deferment. If you don’t qualify for deferment, you can still request a forbearance. Neither deferments nor forbearances are automatic – usually you will need to ask your lender in either case.
6. Pay off the most expensive loans the soonest. If you have different loans, they probably have different interest rates. If you have the ability to pay any of your loans ahead of schedule, start with the ones that have the highest interest rate.
7. Learn about loan forgiveness options. As mentioned above, Public Service Loan Forgiveness is an option if you work in government, nonprofit, or other jobs that are considered public service. Also, if you are a teacher, nurse, AmeriCorps or PeaceCorps volunteer, there are certain federal loan forgiveness programs that may be available to you. There may also be state and private forgiveness programs available to you.
8. Be careful in consolidating. If you decide to consolidate your loans into a single payment with a single interest rate, be careful about it. You should never consolidate federal student loans into a private student loan because there are federal loan borrower benefits that you will lose – like unemployment deferments and certain loan forgiveness programs – if you consolidate to a private loan.