Paying off student loans poses a major challenge for many college graduates. The Project on Student Debt estimates that the average student leaves college with just under $30,000 in loans, more than half of the average starting salary for a college graduate -- $45,000. Combined with other living expenses, a hefty student loan payment can seem like a major burden.
Know Your Loan
If you want to pay off your loan, you need a few pieces of information to get started. These include:
- The amount you owe
- Who your loan is with
- The interest rate on the loan
Find out this information for every loan you hold. It's possible that what you think is one student loan is actually held by different lenders. Sometimes lenders can also sell your student loans to other lenders, so you'll want to stay on top of who currently holds your loan. Typically the lender will send you a letter to notify you of the change.
Understand the Terms
Learning about your loan also involves understanding the terms of your loan. You'll need to know:
- When you have to start paying back the loan
How long you have to pay back the loan
Your interest rate and whether it's fixed or variable
Most student loans require students to start repayment six months after graduation, and generally, students have 10 years to repay the loan. However, this may not be the case if you have a private loan. Sometimes you'll have the option to pay back your loan over a longer period, leading to lower monthly payments, but holding the loan over your head even longer.
Consolidating Your Loans
Consolidating your student loans allows you to combine two or more loans into one payment. It may also give you the chance to lower your interest rate, which can be particularly helpful if you have a loan with a variable interest rate, or one that can increase over time. If you decide to consolidate your loans, you'll also get a chance to look at different repayment plans, including income-based repayment plans and graduated repayment plans where the monthly payment increases over time.
Deferment or Forbearance
Putting off paying your loan with a deferment or forbearance may not seem like an ideal way to start paying it off, but it could buy you some time to get your affairs in order. A deferment allows you to temporarily stop making payments due to factors such as the inability to find full-time work or in case of another financial hardship. Forbearance also allows you to stop making payments or reduces the amount of your payments for a year due to financial hardship, illness, or if your student loan payment equals more than 20 percent of your gross income. In most cases your lender must decide whether to grant you a deferment or forbearance.
Paying on Your Student Loans
Six months after graduation may seem like a long time, but it will go by quickly. Soon you'll have to start adding your student loan payment to your monthly budget and making sure you consistently make the payment on time. Your loan appears on your credit report like any other debt, so failure to pay on time could lower your credit score.
Start Paying Early
Even if you don't have to start paying back your student loans right after you graduate, it helps to start paying them off or at least setting aside money to pay them off as early as possible. If you have multiple loans, you may start by paying on the loan with the highest interest rate to get its balance down before you have to pay on the others. Starting to pay your loans early will also help you get used to making your student loan payment part of your monthly budget.
Make Biweekly Payments
Instead of paying on your student loan once a month, consider making biweekly payments. By paying your loan biweekly instead of monthly, you'll end up making an extra payment at the end of the year, helping you to pay off your loan faster. Your loan amount may also seem less daunting when it's cut in half. Sure, you'll be making that half payment twice a month, but somehow two $300 payments may feel less stressful than one $600 payment.
Make Double Payments
If you have a decent income after college, instead of just paying the regular monthly student loan payment, pay double. Making an extra payment each month will allow you to pay off your loan sooner. If you can't swing a double payment each month, don't let that stop you from paying extra on your loan. Even $25 or $50 extra a month goes a long way towards reducing what you owe. When you do make an extra payment, make sure you make it clear to your lender to apply the payment to the balance of your loan, writing to apply the money to principal on the notes line of the check or selecting a "do not advance due date" box on the online payment submission form.
Utilize Your Tax Return
When you file your taxes you have the option to deduct the interest you paid on your student loan during that tax year. This could lead to you owing less taxes and receiving a slightly larger tax refund. Rather than using your tax return to buy a new TV or expand your wardrobe, apply all of it to your student loans.
Make Some Extra Money
Even though you have a college degree and a shiny new salary to go along with it, you can still take on odd jobs to help pay off your student loans faster. Instead of spending your evenings going out to eat and shopping, take on a part-time job and throw the majority of your earnings at your student loans. You can deliver pizzas, wait tables, or work at a retail store to earn some extra cash. If a formal part-time job doesn't seem like the ideal solution, try taking on odd jobs such as mowing lawns, participating in consumer research studies, or even downloading money-making apps such as Field Agent or Gigwalk.
After you've spent four years as a broke college student, living frugally may not seem like the most exciting option. You have a new job and a new income to go with it, so it's tempting to want to spend money. However, if you want to pay off your student loans, living frugally will give you more money to do so. Cut down your grocery bill by using coupons or coupon and rebate apps such as Ibotta or a store-specific app such as Target's Cartwheel. Look for free concerts and events for entertainment, rather than enjoying expensive dinners with your friends.
Student Loan Forgiveness
Some programs offer to forgive or reduce the amount you owe on your student loans in exchange for working or volunteering with a particular industry or organization. For example, volunteering with AmeriCorps or the Peace Corps could result in a reduction of what you owe. Opting to teach in a low-income or low-performing school district for five years could also cut around $5,000 off your loans.
Make a Commitment
Once you've decided you're going to pay on your student loans, it's time to go all in. If you have a high amount of loans and a low starting salary you'll find that you have to make a lot of sacrifices to pay off your student loans. You may not be able to afford a lot of extras like new clothes, the latest electronics or even an evening out when your friends invite you. However, if you keep the end goal of having a zero balance on your student loans in mind, you'll likely have an easier time making that sacrifice. The feeling of having your student loan paid off at the end will help make the hard work worth it.