In May, Robert F. Smith, who served as the commencement speaker for Morehouse College, captured national attention when he pledged to eliminate the student loan debt of every graduate in the 2019 class. Nearly 400 new alumni from Morehouse are now starting their professional journeys without the burden of debt, thanks to Smith’s remarkable contribution.
This uplifting story can be disheartening for the many students graduating with outstanding student loans. Nevertheless, even without the assistance of an affluent benefactor, you can take charge of your student loan situation. Here are some strategies to help you manage your student loan payments effectively. (Also see: 11 Unique Ways Millennials Are Tackling Student Loan Debt)
Understand Your Total Debt
Most borrowers accumulate student loans each year, which often results in multiple loans from different lenders. Consequently, it can be challenging to grasp the sum of your debt, as tracking it demands some effort.
However, ignoring your total balance can complicate repayment once the grace period is over. Being informed ahead of time will ease the transition once payment deadlines commence. Begin by gathering all the details of the loans you have taken out, checking your federal loan balances through the National Student Loan Data System.
Private loans, on the other hand, may require more digging since no universal database exists for them. If you’re uncertain about your private loan lenders, reach out to your alma mater for this information. You can then contact each lender to get your total balance along with details regarding your grace period and monthly payment amounts.
Now is also a good time to inform your lenders of your updated contact information. Keeping them informed will help you stay on track with your payment schedule. (Also see: How to Manage Student Loans On a Low Income)
Make the Most of Your Grace Period
After graduation, most borrowers enjoy a six-month grace period before they must start making payments. This period can be advantageous as you navigate job hunting or adjust to life’s financial demands.
Utilize this time to establish a budget. Consider saving the estimated monthly student loan payment in a savings account to acclimate yourself to the payment process and kickstart your emergency fund.
Visualize Your Final Payment
Before making your first payment, review your payment schedule and project where you hope to be by your last payment. What goals do you aspire to achieve by then? What career milestones do you envision?
This reflective exercise can serve as motivation to expedite the day you make your last payment. Calculate how adding an extra $40 per month would affect your repayment timeline, and remember that each financial windfall could bring you closer to settling your loan.
Consider Your Repayment Options
The standard repayment plan generally requires monthly payments over a span of 10 years, which can be manageable for many borrowers.
However, if you are graduating into a challenging job market or facing other difficulties, the traditional plan may not be suitable for you. Federal student loan borrowers have several repayment alternatives that can better cater to their financial situations:
Graduated Repayment
This plan begins with lower payments that increase every two years. Although you’ll complete repayment within 10 years, it may result in higher interest payments overall.
Extended Repayment
This option is available for borrowers with over $30,000 in loans, offering a choice between fixed or graduated repayment terms over a maximum of 25 years. However, like the graduated plan, it results in increased interest expenses.
Pay As You Earn (PAYE)
Under the PAYE plan, monthly payments are set at 10% of your discretionary income but will not exceed the standard 10-year payment rate. Payments are reassessed annually based on your income and family size, and after 20 years of timely payments, any remaining balance will be forgiven.
Revised Pay As You Earn (REPAYE)
Similar to PAYE, the REPAYE plan has no upper limit on monthly payments. Therefore, if your income rises to the point that 10% of your discretionary income exceeds the standard payment amount, you will pay the higher rate. Loan balances for undergraduate debt will be forgiven after 20 years, with forgiveness after 25 years for graduate loans.
Income-based Repayment
If your debt outweighs your income significantly, the income-based repayment option might suit you. Here, your monthly payment could be set at either 10% or 15% of your discretionary income, and after 20 years of consistent payments, any remaining balance will be forgiven.
Income-contingent Repayment
This plan sets monthly payments to the lower amount of either 20% of discretionary income or what you would pay under a fixed 12-year repayment schedule. Your payments are reviewed annually, and any remaining balance after 25 years will be forgiven.
Income-sensitive Repayment
This option is available for low-income borrowers with Federal Family Education Loan (FFEL) Program loans, basing your payment on your yearly income, while ensuring full repayment within 15 years.
Although private student loans usually have fewer repayment options than federal loans, it’s still beneficial to reach out to your lenders to explore any available solutions if standard repayment seems overwhelming.
Know Your Rights Regarding Forbearance and Deferment
Federal student loan borrowers benefit from options that can ease repayment during difficult financial times.
Forbearance allows borrowers to temporarily pause payments for up to 12 months, during which interest will accumulate. You can choose to pay the accrued interest or let it add to your loan principal, which can compound. Generally, borrowers are permitted a maximum of three instances of forbearance, with a total limit of 36 months.
Deferment operates differently, allowing payment pauses in six-month increments. Gaining deferment can be stricter, as it absolves you of the interest accrued during the period.
Both options should be reserved for genuine financial emergencies, such as unemployment, illness, disability, or the challenges of parenthood.
Investigate Consolidation and Refinancing Options
You may also reduce your monthly payments by consolidating or refinancing your student loans, though these terms refer to different processes.
Federal loan consolidation merges multiple federal loans into one, resulting in a single repayment schedule. However, private loans cannot be consolidated. While this process can lower monthly payments (at the cost of potentially extending your repayment period), you will likely not save on interest, as it is calculated based on the weighted average of the consolidated loans’ rates. It also allows you to switch from a variable to a fixed interest rate.
Refinancing similarly allows you to lump your loans together but entails obtaining a new private loan to pay off your existing loans, after which you must adhere to the terms of the new loan.
The benefit of refinancing is that you can consolidate both federal and private loans and possibly receive a better interest rate or terms. However, it’s essential to note that refinancing a federal loan means forfeiting access to federal benefits, such as improved repayment options and the ability to defer or pause payments.
The Journey to Debt Freedom
While Morehouse College’s 2019 graduates may have received an unexpected advantage, every borrower can anticipate the day they will be debt-free.
For individuals without a fairy-tale benefactor, successfully eliminating student debt requires familiarity with your loans, rights, options, and budgeting strategy. A bit of proactive planning now can alleviate vast amounts of stress and energy down the line as you navigate your journey to becoming debt-free.
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