By Kristen Baker | Senior Financial Coach | The Financial Clinic
Whether you just stepped across the stage and threw your cap in the air, or it’s been several years since you stepped foot in a classroom, we have some tips to help you tackle your student loans head on.
Recent Grads: Congrats! You’ve taken your last exam, walked across the stage, and put the finishing touches on your resume. Now what?
It can be easy to get caught up in the feeling of hard-earned freedom before you start your first job. But, once the party decorations are taken down, take a minute from basking in your success to think about the future. That means taking time to get your student loans in order.
First things first, you must determine what kind of student debt you have. Is it Federal? Private? A combination of the two? In order to determine how to deal with your student loans, you’ll need to determine what type you have. Generally speaking, there are two types of student loans: federal and private.
Federal loans are loans from the government. According to studentaid.ed.gov, the U.S. Department of Education has two federal student loan programs:
- The William D. Ford Federal Direct Loan (Direct Loan) Program is the largest federal student loan program. Under this program, the U.S. Department of Education is your lender. There are four types of Direct Loans available:
- Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school. Interest does not accrue on these loans while the student is enrolled at least half-time and for 6 months after they drop below half-time enrollment.
- Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students, but in this case, the student does not have to demonstrate financial need to be eligible for the loan. Interest on Unsubsidized loans accrues from the moment the loan is disbursed.
- Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. It is important to note that unlike the Subsidized and Unsubsidized loans, PLUS Loan eligibility is based on the applicant’s credit history. Additionally, the loan liability for Parent PLUS loans lies solely with the parent(s) who applied for it – not the student – and liability cannot be transferred to the student at any time.
- Direct Consolidation Loans allow you to combine all of your eligible federal student loans into a single loan with a single loan servicer. Other Direct loans, as well as Stafford/FFEL loans, can all be consolidated into a Direct Consolidation Loan.
- The Federal Perkins Loan Program is a school-based loan program for undergraduates and graduate students with exceptional financial need. Under this program, the school is the lender, so eligibility requirements will vary by educational institution. If you have questions about Perkins Loan eligibility, it is best to contact the school’s financial aid office directly.
Private student loans are often from banks, credit unions, state agencies or directly from a school. If you’ve determined that you have private student loan debt, you should contact your loan servicer to find out what options you have for repayment. Private student loans do not have regulated terms and interest rates on private loans are usually higher than federal loans. It is best to try and pay them off as soon as possible to avoid accruing a lot of interest over the life of the loan.
If you’re not sure what type of loans you have, there are a couple different ways you can track down this information. The easiest way to determine your loan type(s) is simply by calling the servicer and asking. But, if calling up a company you owe tens of thousands of dollars to doesn’t sound like an ideal way to spend your day, you can also check out your loan records on the National Student Loan Data System, nslds.ed.gov. If you know your Federal Student Aid ID (hint: it’s the login information you use for FAFSA), you’ll use those credentials to log into this system, too. If you don’t have or remember your Federal Student Aid ID, you can create a new one at fsa.ed.gov. Once you’ve logged into NSLDS, you’ll be able to see all of the federal loans you have ever borrowed. If you have any loans that are not showing up in NSLDS, it is likely that they are private loans.
Once you have discovered what type of loans you have, it is time to look into what types of payment plans are available to you. As mentioned before, private loan lenders can determine the repayment options for their loans, so it is best to contact the lender as soon as you leave school to determine when your payments will come due and what types of plans are available. If you have federal loans, the repayment options are much more varied. All federal student loan borrowers will be automatically put into the Standard Repayment Plan. In this plan, your payments are based simply on what must be paid monthly in order to allow you to pay off your loans in 120 months (10 years). While this option typically amounts to the least amount of interest paid over the course of the loan, it is not always affordable to people, especially those just entering the workforce. If this is the case for you, you should look into one of the Income-Driven Repayment (IDR) or Graduated Repayment plans. The IDR plans are all based on your income to make payments more affordable. However, because the monthly payments are lower, the length of the repayment period is much longer, up to 25 years for some plans. The Graduated repayment plan offers payments that start out lower and increase over the life of the loan, allowing for the full amount to be repaid in 10 years. While it may seem affordable at the beginning, the monthly payments at the end of a Graduated plan can be quite lofty. Because of this structure, the Graduate payment can be a good option for folks like doctors who are very confident they will have a huge spike in income within a few years of finishing school. It is a riskier plan for people going into jobs that don’t often see a huge increase until much farther into their career. Regardless of the plan you choose, below are a few best practices to consider when working on paying your loans.
- Line up the due dates with your paycheck to ensure you’ll always have enough to cover your bill.
- Set your bill on autopay. Not only does this remove the risk of forgetting to make the payment, but many loan lenders offer an interest rate reduction for choosing this payment method.
If an unexpected change in income occurs, be sure to communicate that with your loan servicer as quickly as possible so that you don’t fall behind! You may be able to update your payment amount or choose a temporary forbearance. Some payment plans even allow $0/month payments. While plans like this one won’t do anything to bring down the loan balance, they do keep the loans from going into default.
Download a free Change Machine tipsheet to help you figure out which repayment plan is right for you WhichStudentLoanRepaymentPlanIsRightForMe, and check out StudentAid.gov for more in-depth information on your options!
“What if I graduated a long time ago, but have never successfully entered or stuck with a payment plan?”
While things may be trickier if your loans are already delinquent or defaulted, there are still options. We understand that sometimes it’s been so long, you’re not sure who to pay or how much. Luckily, no matter how long ago you borrowed them, the National Student Loan Data System will still have a record of all federal loans. If it’s been many years, the servicer of your loans has probably changed from the one you originally signed a Master Promissory Note with, so the first thing you want to do is log into NSLDS and find out who currently holds your loans.
Once you find out which company holds your loans, contact them to work out a payment plan. Generally, there are two options for defaulted loans to get back in good standing. The first is loan rehabilitation. In rehabilitation, the borrower must make 9 “reasonable and affordable” payments within 10 months. If you meet income eligibility requirements, these payments could be as low as $5/month (as opposed to $0/month on Income-Driven Repayment plans for loans in good standing). Once the 9th payment is made, your loans will return to good standing, and you can take advantage of any federal repayment option. The second option is consolidation using a Direct Consolidation Loan as mentioned before. If you choose to consolidate your older, defaulted loans, they will be paid off with the brand new consolidation loan that is in good standing. Rules and regulations around student loan default resolution are subject to change, and sometimes know the right questions to ask your servicer can be difficult. But, please don’t be intimidated! If you don’t feel like you are making progress or finding a repayment option that works for you, don’t be afraid to hang up and call back another day to speak to a different representative.
We know that thinking about paying down your student loans can be a daunting process. If you are a recent grad, it may be the first big, long-term decision you have had to make. But starting yourself on the path to becoming student loan free by getting organized and getting informed is the best way to ensure success. And just think how good will it feel to have those loans gone so that you can start using those monthly payments to save up for that backpacking trip around Southeast Asia or that house you have been looking to buy! It is only by tackling these debts head on that you find yourself on the path to a student debt-free future. So go forth, pay down those loans, and tell us all about it on Facebook and Twitter because, just like your grandma, we are always looking for new success stories to brag about!