New Graduates’ Guide to Paying Off Student Loans

If you recently graduated from college with a student loan, you may be wondering what to do with your loans. How long will it take to pay off the debt? How much would you have to pay monthly? When do you start repaying?

These are just some of the questions you may have as you prepare for a new chapter in life after school. This article will walk you through some of the terms you need to know, concepts that only apply to student loans, and steps you can take to take control of your student loans.

I finished school. What now?

Before accepting a refinancing offer or choosing a repayment plan from a list of acronyms that you don’t really understand, evaluate your current financial situation and think about your career and goals. You cannot achieve your goal if you do not know where to start.

First of all, you need to know what happens when you graduate, leave or enroll mid-term from your university, degree or vocational school. If you have federal loans (such as Stafford loans), you may have a grace period or grace period, usually six months, before you need to start paying. If you cannot make the payments, you can request a deferral. You are not obliged to make payments during the grace period, deferral or deferral. Note, however, that interest may still accrue during the non-payment period.

Take stock of your credit

Use this period to take stock of all the loans you took out during your studies. If you have federal loans, sign up or create your studentaid.gov account. All of your federal loans will be listed there. If you have a private student loan, you can get a free credit report that shows you all of your loans. You can get one from one of the three credit bureaus or a website like annualcreditreport.com. If you only have personal loans, you can skip to the section titled “Strategy # 1: Pay Back Your Loans ASAP to Minimize Interest”.

Federal student loans are unique and complicated

Federal student loans are different from other types of loans because they come with benefits such as flexible payments, waiver and deferral or deferral. This multitude of options were introduced to make it easier for borrowers to repay, but too many choices can be intimidating and easy to get overwhelmed by.

The most important thing to know is that you don’t always have to repay in full the loans you take out. In the case of federal loans, you pay back the entire loan, including principal and interest, over a specified period of time when you repay the standard 10-year plan or the extended and tiered repayment plans. However, when you sign up for one of the income driven repayment plans (IDR), you pay a percentage of your income for a set period of time and the balance is then waived. This type of loan waiver can be either tax exempt or taxable, which means that the dollar amount waived either counts as part of your income or not in the year it is waived.

Special considerations for income-based repayment plans

Obtaining a loan in an IDR plan can be quite complex. Therefore, knowing how the system works and having a strategy for navigating it is important if you want to save money. If you are enrolled on an IDR plan, here are some things you should know:

  1. You will need to review your income every year to recalculate your monthly payments.
  2. If you are married and register your taxes as a separate filing instead of jointly, your monthly payment will be lower in all but one IDR plan (the only exception is the Revised Pay-As-You-Earn Plan) as your income only used to calculate the payment amount.
  3. Loans disbursed under an IDR plan are waived if there is a remaining balance at the end of the term.

Credit service provider

Also, look for communications from your loan service provider. They take care of the administrative tasks related to your student loan, such as accounting, for you free of charge. However, do not rely on the servicers to choose your repayment plan or strategy as the servicers are not trained finance professionals. There are short and long term implications to any student loan repayment option you choose, 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 taking advantage of borrowers who are confused by the state options. Some may offer to consolidate your federal loans for a fee, or worse, offer discounted repayment options that aren’t available. There are no fees for amending repayment schedule changes or consolidation within the federal system, and the government will never contact you to offer a “discount” or “deal” on your student loans. If you receive such an offer, ignore it. These scammers often sound professional and knowledgeable. Under no circumstances should you give out your personal information such as your social security number or your registration details for studentaid.gov.

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 need to assess where you are now financially and where you stand and want to be in the short and long term. If you have a job, what is your current income? How do you think your income will 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 be debt-free and financially independent as quickly as possible and live frugally? Or do you want to get married, buy a home, and enjoy quality time with your family while managing your long-term loans?

There is no right or wrong answer. When you have an overview of your financial situation and your goals, you can begin to strategize.

Strategy based on your goals

If your priority is to save money, there are two main loan repayment strategies:

  1. Pay off your debts as soon as possible and minimize the interest.
  2. Pay as little as possible and maximize forgiveness.

Strategy # 1: Pay off loans as soon as possible to minimize interest

By paying off the entire loan balance as quickly as possible, you can save money as you will minimize the interest on the loans. You can also lower the interest rate by refinancing your loans to get a lower interest rate, as shown in this article: “With personal loan interest rates this low, should you be refinancing a federal student loan?”

You can save a lot of money by shopping at great prices, and it is often a good idea to refinance multiple times if you can save money. However, if you have federal loans and are considering refinancing, it is important to know that you will be permanently removing your loans from the federal system, meaning your loans will no longer be eligible for benefits such as IDR plans and loan waiver.

Strategy # 2: Pay as little as possible in IDR and maximize forgiveness

Many of us are taught how to get rid of debt, so it may seem counter-intuitive, but if your pursuit of forgiveness is yours, you can save more money by adding as little as possible to your credit. Those who pursue this strategy should explore all of the planning strategies used to lower their monthly IDR plan payments and make sure they are doing everything right to be on the road to forgiveness. (To see an example of how IDR plans and forgiveness programs work together, see the case studies in this article, “The Best Way to Pay Off $ 250,000 on Student Loans.”)

An alternative strategy: keep your loans in the federal system

There is another strategy that is less often followed as it may not necessarily save you money. Let’s call this the strategy of the “federal insurance”. With this strategy, you will keep your loans in the federal system, even if it costs you more, but you would be protected from unexpected events such as the loss of your income. Think how federal borrowers who lost their jobs during the pandemic benefited from the 0% interest and payment freeze in March 2020. This is a good strategy if you are expecting or experiencing major life changes, such as changing families or jobs, and your cash flow is unstable.

Conclusion

Student loans can be intimidating. You might hear terms like refinance, consolidation, income-oriented repayment plans, and their confusing acronyms, and wonder if you should be doing what your friend did too. But questions like “should I refinance?” Or “should I consolidate?” Are not the questions you should ask yourself first. They are simply tools for managing your finances in order to live the life you want.

It is very important to examine your student loan repayment options to find out what is best for your situation. If you are unsure of what to do with your student loans, consult a professional with experience in student loans.

Associate Planner, Insight Financial Strategist

Saki Kurose is a Certified Student Loan Professional (CSLP®) and a candidate for CFP® certification. As an Associate Planner at Insight Financial Strategists, she enjoys helping clients with their financial challenges. Saki is particularly passionate about working with student loan clients to find the best repayment strategy that fits their goals.

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