If you recently graduated from college or graduate school and received student loans, you may be wondering what to do with your loans. How long will it take to pay off the debt? How much do you have to pay monthly? When to start repayment?
These are just a few of the questions you may have as you prepare to start a new chapter in your life after school. This article will introduce you to some of the terms you need to know, concepts unique to student loans, and steps you can take to take control of your student loans.
I graduated from school. Now what?
Before accepting a refinancing offer or choosing a repayment plan from a list of reductions you really don’t understand, assess your current financial situation and think about your career and goals. You won’t be able to get to your destination if you don’t know where to start.
First, you need to know what happens when you graduate, drop out of college, graduate school, or vocational school, or don’t enroll part-time. If you have federal loans (such as Stafford loans), you may have a grace period or grace period, which is usually six months, before you have to start making payments. If you are unable to make a payment, you can apply for a deferred payment. You are not required to make payments during the grace period, grace period, or grace period. However, keep in mind that interest may continue to accrue during the non-payment period.
Take an inventory of your loans
Use this time frame to take an inventory of all loans you borrowed during your studies. If you have federal loans, please sign in or create your studentaid.gov Account. You will see a list of all your federal loans. If you have private student loans, you can get a credit report for free to see all your loans. You can get it from any of the three credit bureaus or from a website like Annualcreditreport.com… If you only have private loans, you can skip to the section “Strategy # 1: Pay off loans as quickly as possible to minimize interest.”
Federal student loans are unique and complex
Federal student loans are different from other types of loans because they provide benefits such as flexible payments, forgiveness, and deferral or deferral. These many options were introduced to make it easier for borrowers to repay, but too many options can be daunting and easy to fail.
The most important thing to know is that you do not always need to repay the entire amount of loans taken. For federal loans, if you repay the standard 10-year plan or the advanced and phased repayment plans, you repay the entire loan, including principal and interest, over a specified period of time. However, if you sign up for one of the income-driven repayment (IDR) plans, you pay a percentage of your income over a period of time and then the remaining amount is forgiven. This type of loan forgiveness may be tax deductible or tax deductible, which means that the dollar amount forgiven either counts as part of your income or not in the year it was forgiven.
Special considerations for income-based repayment plans
Loan forgiveness in an IDR plan can be quite tricky and therefore it is important to know how the system works and have a strategy to navigate if you want to save money. If you are enrolled in an IDR plan, you should know that:
- You must check your income annually to recalculate your monthly payments.
- If you are married and filing separately and not jointly, your monthly payment will be lower in all but one IDR plans (the only exception is the revised pay as you earn plan) because only your income is used to calculate the payment. quantity.
- Loans disbursed under the IDR plan are forgiven if there is a balance left at the end of the term.
Also, look for messages from your loan officer. They perform administrative tasks related to your student loans, such as invoicing, at no cost to you. However, do not rely on the service providers to select your repayment plan or strategy because the service providers are not qualified financial professionals. Whichever student loan repayment option you choose has short and long term implications, and they can be significant. Depending on the plan you choose, you can save or lose thousands (or even hundreds of thousands) of dollars. YOU need to know which strategy is best for you!
Beware of scammers
There are many third party companies that use borrowers confused by federal options. Some may suggest combining your federal loans for a fee, or worse, offering discounted repayment options that don’t exist. There is no federal fee for changing repayment plans or consolidating under the federal system, and the government will never contact you to offer a “discount” or “deal” on your student loans. If you receive such offers, ignore them. These scammers often appear to be professional and knowledgeable. Do NOT under any circumstances divulge your personal information, such as your Social Security number or studentaid.gov login details.
Prioritize your career and goals: what is most important to you?
When you know how much you owe and what to expect after graduation, you have to assess where you are financially and where you think you will and want to be in the short and long term. If you have a job, what is your income right now? How do you expect your income to change over the next five, 10, or 20 years? What are your career plans and goals? And perhaps more importantly, what is most important to you? Do you want to get free of debt and become financially independent as quickly as possible, and want to live economically to achieve this goal? Or do you want to get married, buy a house and spend time with your family while you manage your debts?
There is no right or wrong answer. Once you have a complete picture of your financial situation and goals, you can start developing a strategy.
Developing a strategy based on your goals
If you want to save money in the first place, there are two main loan repayment strategies:
- Pay off debt as quickly as possible and minimize interest.
- Pay as little as possible and goodbye as much as possible.
Strategy # 1: Pay off loans as quickly as possible to minimize interest
By paying off the entire balance of your loans as quickly as possible, you can save money by minimizing the interest charged on your loans. You can also lower your interest rate by refinancing your loans to get a lower interest rate, as shown in this article. “Should a federal student loan be refinanced at such low interest rates on private loans?“
You can save a lot of money by choosing good rates, and it is often a good idea to refinance multiple times if you can save. However, if you have federal loans and are considering refinancing, it is important to know that you will permanently remove your loans from the federal system, which means that your loans will no longer be eligible for benefits such as IDR plans and loan forgiveness.
Strategy # 2: Pay as little IDR as possible and maximize forgiveness
Many of us are taught to get rid of debt, so it may seem counterintuitive, but if you seek forgiveness, you can save more money by paying off as few loans as possible. Those who follow this strategy should examine all of the planning strategies used to lower their monthly IDR payments and make sure they are doing the right thing to walk the path to forgiveness. (To see an example of how IDR plans and the forgiveness program work together, you can take a look at the case studies in this article “Best Way To Pay Off $ 250,000 Student Loans… “)
Alternative strategy: keeping your loans in the federal system
There is another strategy that is less often followed because it may not necessarily save you money. Let’s call this the federal insurance strategy. With this strategy, you keep your loans in the federal system, even if it costs you more, but you will be protected from any unexpected events such as loss of income. Think about how federal borrowers who lost their jobs during the pandemic benefited from the 0% interest and payment freeze introduced in March 2020. This is a good strategy if you are expecting or experiencing big changes in your life, such as growing family or job changes, and your cash flow is unstable.
Student loans can be daunting. You may hear terms like refinancing, consolidation, income-driven repayment plans and their confusing acronyms and ask yourself if you should be doing the same as your friend. But questions like “Should I refinance?” or “Should I unite?” these are not the first questions you should ask. They are just tools to manage your finances to live the life you want.
It is very important to research your student loan repayment options to find out what works best for your situation. If you are unsure of what to do with your student loans, contact a specialist with experience with student loans.
Associate Planner, Financial Strategists Insight
Saki Kurose is a Certified Student Loan Professional (CSLP®) and CFP® Certification candidate. As an Associate Planner in Astute financial strategists, she enjoys helping clients solve their financial problems. Saki is especially passionate about working with clients with student loans to find the best repayment strategy that suits their goals.