Repayment of your student loans can be a daunting task. However, repayment is achievable and many students successfully accomplish this task each year. The best-case scenario would mean that a student loan repayment strategy begins while a student is still in school. This blog post will provide 5 steps to establishing a repayment plan.
Step 1: Estimate the dollar amount of student loans you are on track to borrow while in school. To arrive at this estimate complete simple addition of how much you would have borrowed by the time you graduate if you were to continue to borrow at the same rate each semester.
With an estimate of how much you will borrow while in school you can utilize an online student loan calculator to get a rough estimated calculation on what your monthly repayment amount would be after graduation. To get a more accurate estimate we encourage students to meet with one of our financial coaches and build a projected repayment plan.
We encourage students to weigh this monthly payment amount against what there expected salary (in the career field they have chosen) and cost of living (in the city they would like to live in after school) will be upon graduation to determine whether the amount they are borrowing is an affordable amount.
Step 2: Start repayment of your student loans early. Students are able to begin making payments on their student loans prior to graduating to reduce the balance and get ahead. The steps for a student to make an online account with their loan servicer to make payments are outlined in part 1 of this blog series.
When you graduate or go below half-time as a student you are given a sixth month grace period before you are required to make your first payment. If a student has not already started making repayments we advise that students make payments during the grace period. It will allow the student to get ahead and reduce the monthly payment amount during the repayment period.
Step 3: If I am able to begin making payments early or I am to allocate additional dollars above my required monthly payment amount which of my student loans should I put the money towards? We suggest picking your student loan with the highest interest rate to allocate early or extra payments towards as this reduces the amount of interest that you will pay back over the duration of the loan and save you money
Step 4: Entering Repayment Phase. As mentioned previously six months after graduation or dropping below half-time payments will come due. It is most essential that you prepare ahead of time to make sure that your budget is prepared for the new monthly payment required. A common mistake the graduates make is adding too many fixed expenses to their budget in the six month grace period prior to their loans coming due. This then makes repayment difficult even when a graduate has begun a decent paying job. We strongly encourage students as soon as they land a job to create a space in their budget for their student loan payment.
Secondly, you must decide which repayment plan to choose. Access to the different repayment plan options that you have will be found either by logging into your student loan service account or speaking with a student loan servicer representative.
There a four repayment options that are most common. The standard repayment plans, graduated repayment plans, extended repayment plans and income-based repayment plans.
Standard Repayment Plan: Unless you request an alternative payment plan you usually will be enrolled in the standard repayment plan. This plan means that you will be expected to make a monthly payment for ten years. This means 120 equal payments to pay off your students loans. As with all of the payment plans you are able to make additional payments to reduce your loan balances and pay them off early. We advise students to utilize this payment plan if at all possible. This is because this particular plan will cost a student the least amount of compounded interest charges.
Extended Repayment Plans: These particular plans allow you to extend your payments out over 20 to 25 years. This plan means that your monthly payment will be a reduced payment. It will be either 240 or 300 monthly payments. This repayment plan is kinder on the monthly budget but will cost much more money through more interest compounding over the duration of the loan
Graduated Repayment Plans: These particular plans start with monthly payments that are lower at first and then increase over a ten year period. The payments towards the end of the ten years will a much larger sum. In some instances this plan can expand beyond ten years. Once again this plan is friendlier to a monthly budget at the beginning. If you opt to use this plan it will cost more money over time than the standard repayment plan due to more interest accruing at the beginning portion of the repayment plan.
Income-Based Repayment Plan: There are a number of different forms of this plan. All of the plans of this nature determine your monthly payment amount based off a percentage of your income to ensure to that the payment is affordable. This payment plan takes anywhere from 15 to 25 years of monthly payments to complete. As with all of the plans mentioned except the standard repayment plan choosing this plan will mean additional money will be paid in interest. If you are eligible for the public service loan forgiveness program one of these payment plans may be good for you.
Step 5: Begin making payments! You can do it. Don’t lose hope. Remember, the more proactive you are on the front end with planning and attempting to minimize borrowing while in school the more money you will save! Here is one final tip to save you money. If you schedule an automatic electric monthly payment from your checking or savings account, you receive a 0.25% interest rate deduction on Federal Direct Loans.
We are here to help. If you would like assistance building a plan to minimize student loan debt and repay your student loans the WKU Center for Financial Success is ready to help. Click here to schedule a free financial coaching session today!
If you haven’t had a chance to read the previous posts in the Student Loans Demystified series catch up here:
Student Loans Demystified Part 1: Where do I start?
Student Loans Demystified Part 2: Terminology Simplified