Student loans are a great financial tool for those aspiring to pursue higher education but may not have the funds upfront. There are multiple ways to secure this loan, from private financial institutions to government-backed federal programs. While these loans can open doors to better career opportunities, they also come with long-term repayment responsibilities. Thankfully, with the right approach, one can stay on top of payments, reduce interest, and repay the debt without excessive burden.
1) Evaluate the Total Debt
Often, students have to rely on multiple loans to fund their entire education until graduation. This usually means that one would have acquired debt from multiple sources, be it private firms or federally backed programs. So, before diving into any student loan repayment plan, one must first calculate the total amount one owes. This will help one carefully choose a repayment plan. For privately issued loans, one would need to refer to their loan servicer account to determine their total owed amount; for federal student loans, one can visit the StudentAid.gov website.
2) Go Through the Terms and Rules
Next, one must go through all the repayment conditions set by the lender. Different loans, especially if issued by different lenders, will have varying repayment terms and interest rates. Knowing these details will help one choose a payment strategy and avoid penalties.
Additionally, one must check the grace period for each of their student loans. This is the time between the completion of graduation and when the repayment term officially starts. This brief buffer period helps students plan their financial strategies.
3) Explore Different Repayment Plans
Depending on one’s financial condition and requirements, there are a few student loan repayment plans to consider
- Standard repayment plan: This is the basic plan that is usually offered for federal student loans. As per this plan, an individual is required to settle their loan over a period of 10 years or 120 monthly payments.
- Income-driven repayment plans: Also known as IDR, these plans allow people to adjust their monthly payouts depending on their income and family size. A bigger family or a lower monthly income can both lower the amount of one’s monthly payment.
- Pay as you earn (PAYE): With this repayment plan, one would only need to pay about 10% of their monthly income, as long as one can prove their financial hardship to the lender. The plan can extend the repayment term to 20 years.
- Extended repayment: This plan allows one to extend their repayment period to 25 years for a lower monthly payment.
4) Consider Debt Consolidation
This strategy involves combining all the student loans and repaying them as a single loan. The debt consolidation option can make repayment more manageable and allow for a longer repayment term, potentially lowering monthly payments. But this also means that the interest rate would increase. In some cases, it is also possible that the new consolidated loan may have a higher interest rate than the total student loan interest rates before consolidation. So, before considering this option, it is important to read all the terms and evaluate whether the long-term cost is worth the short-term relief.
5) Check Out Student Loan Forgiveness Programs
Depending on their profession, individuals can be eligible for student loan forgiveness programs. The Public Service Loan Forgiveness (PSLF) program is one such example. According to this program, individuals working in public service jobs—be it for the government or non-profit organizations—can have their student loans forgiven. But to qualify for the loan, the individual would also need to be a part of the income-driven repayment plan and make payments for the first 10 years. The remaining loan amount would be forgiven.
Like PSLF, the Teacher Loan Forgiveness program overlooks a part of student loans for people who have been employed in eligible teaching positions.
6) Refinance the Loan
This step involves replacing the current student loans with a new single loan, ideally at a lower interest rate. For this new loan, individuals can then select their preferred loan term. At this stage, it is in one’s best interest to choose a shorter loan term to accrue less interest. It may mean making higher monthly payments, but overall, one will be paying a lower amount.
7) Set Up Automatic Payments
One of the simplest yet most effective ways to manage student loan repayment is to set up automatic payments. Not only will this prevent one from missing repayment due dates, but it will also help one save some funds. This is because most lenders offer a small interest rate reduction—usually around 0.25%—as a reward for activating automatic payments.
8) Pay Extra Principal
Whenever possible, consider making extra payments toward the loan’s principal. This means, at times, try paying a little more than the due monthly amount. This directly reduces the total balance owed, which in turn decreases the amount of interest that will accrue over time.