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Just graduated? Congrats! Term papers and late-night cramming are officially behind you. But before you dive into the real world, there's one last to-do that needs to be done — getting your student loans in order.
"The average debt at graduation for a bachelor's degree is about $37,000," says higher education expert Mark Kantrowitz, publisher of Cappex.com, a college planning and financial aid site.
While that number, a projection based on federal student loan data and tuition inflation, is pretty hefty, there is some light at the end of the tunnel. Kantrowitz adds that as long as your total student loan debt is less than your annual starting salary, which is estimated to be about $45,000 to $50,000 for new grads this year, you should be able to repay your loans within 10 years. Translation: More often than not, it's affordable debt.
To help make sense of your student loan bills — and fuel your repayment plans — take a peek at these six things all new grads should consider.
"The typical student is going to graduate with eight to 12 loans; one or two for each year of school, sometimes more," Kantrowitz says. Therefore, "it's very easy to lose track of your loans."
When it comes to taking stock of who and how much you need to repay, Daniel Wrenne, CFP®, founder of Wrenne Financial Planning in Lexington, Kentucky, suggests checking out the National Student Loan Database System (NSLDS) for a big-picture view of your federal debt. "It's a government website, so it's different from your actual loan servicer," he says. "It's like your transcript of student loans."
For clarification on how many private loans you have, Wrenne suggests checking your credit report for a line-item view of your account numbers, dates of opening, loan statuses and remaining balances. You can request one free copy of your report every year from each of the three major credit bureaus — Experian, Equifax and TransUnion.
Once you've pinpointed all your loans, tally up the total owed to each lender, along with each interest rate. The majority of lenders offer a grace period before repayment begins, so you generally have about six months to get things in order.
Interest will continue to accrue during this window in many cases. For unsubsidized loans, you’ll be responsible for paying interest accruing at all periods. However, “[for] subsidized loans, except those made in 2012–13 and 2013–14, the federal government pays the interest during the grace period," Kantrowitz explains. If you’re eager to get going on those payments, "students can make payments during the in-school and grace periods, if they wish.”
Determine the Best Monthly Payment for You
Now it's time to figure out which monthly plan is best for you. FYI: If you don't select a specific one, you'll automatically be put on a standard 10-year repayment plan.
"You should choose the payment plan with the highest monthly payment you can afford," Kantrowitz suggests, in order to cut down on the interest you’ll owe in the long run. In plain terms, doubling the repayment time often means more than doubling the total interest you pay.
But when deciding on a monthly payment that best fits your budget, there are some other key factors to consider. For starters, do you have a solid emergency fund? Any credit card debt? Retirement savings? These questions should be guiding your pay-off plan. Your income may allow you to sign up for larger monthly payments, but if it's at the expense of other goals, it may not be worth it.
"I recommend evaluating your entire financial situation, not just student loans, once a year," Kantrowitz advises. "The goal should be to pay down higher-cost debt quicker, to avoid carrying a balance on credit cards, and to maximize the employer match on retirement plan contributions."
Revisit your repayment plan as needed. That said, once you've settled on a plan you're comfortable with, consider signing up for auto-pay. Not only does it greatly reduce the odds of missing a payment, a lot of lenders actually give a slight rate deduction — usually a quarter of a point to a half a point — as an incentive to sign up.
Keep on Top of Your Payments
Whether it's due to a dip in income, a stint of unemployment or an unexpected pop-up expense, even the best financial plans go off the rails sometimes.
"Falling behind on your payments will definitely impact your credit rating," says Terrence Banks, a certified student loan counselor with ClearPoint Credit Counseling. "It may not be as immediate as when you default on a credit card payment, but make no mistake — staying current on your payments is an absolute must. After 30 days, [lenders] will start calling and putting pressure on you, just like any other collection company."
Federal loans generally take between 270 and 360 days for default to occur. On private loans, it's typically only 120 days. If you're finding it difficult to make your minimum monthly payment, contact your servicer about what your options are.
Be Strategic in Paying Down Your Debt Faster
If, on the other hand, your monthly payment is reasonable and you're up to speed on your other financial goals, you might want to increase your student loan payments.
"If you have extra money in the month and you want to pay down your student loans quicker, you should target the loan that has the highest interest rate for accelerated repayment by making extra payments on that loan," Kantrowitz says.
Making extra payments can be tricky for the new grad. If you simply write out more than the minimum payment or send in an extra check, the lender might treat it as an early payment of the next installment due and may push out your subsequent billing date. What you want is for them to take your regular payment, plus an additional one to lower the principal balance.
Under federal regulation, with exception to select income-based repayment plans, your payment may first go toward any outstanding charges or fees on your loan. Next, the amount would be applied to any accrued but unpaid interest; that's typically the interest that's accrued since the last payment, Kantrowitz explains. "After it's applied to the interest, any remaining amount is applied to the principal."
This means that timing is key. Making an extra payment the day before your regular due date, for example, won't have as big of an impact on your principal balance as making it the day after.
You’ll also need to specify which loan you'd like the lender to apply the extra payment to. Kantrowitz advises sending in a cover letter with your payment — e.g., “This is an extra payment, not an early payment, on Loan ID # to reduce the principal balance of that loan” — to make sure your extra payment is applied as intended.
Think Long and Hard About Consolidation
If you've got a dozen or so loans, it might seem like a no-brainer to consolidate them into one loan with one monthly payment. But before you do that, you may want to take a close look at your interest rates.
Chances are, you have a mix of rates; some higher than average, some lower. One advantage of not refinancing your loans is that it allows you to accelerate your payments on the highest interest loan to ultimately pay it off faster. Not so if you go for consolidation.
"Once you have one loan, you can't target the loan with the highest interest rate for quicker repayment," Kantrowitz says. He adds that consolidating multiple federal loans into one private loan likely won't add up to an interest rate that makes consolidation worth it.
Banks emphasizes that consolidating your loans is a one-shot deal that can't be undone. Then again, while it might mean paying more interest in the long term, you may be able to lower your monthly payments by way of extending your repayment timeline in order to create more financial breathing room in your day-to-day life.
"There's the convenience of having one payment as well. And any variable interest rate will become a fixed rate," Banks says, which could be ideal if you want to lock in a lower, static interest rate over the course of your repayment window.
Interest rates aside, consolidation may mean access to alternative repayment plans, but you may lose out on some borrower benefits offered with the original loan.
Understand the Pros and Cons of Deferment and Forbearance
Deferment and forbearance are terms often thrown around regarding student loans; let's clarify what they actually mean. A deferment is a period in which your payments are temporarily put on hold. The government may also foot the bill for your interest during this time, depending on the type of loan. You may be eligible if you're enrolled in grad school, unemployed, experiencing an economic hardship or other factors.
"Deferment is a borrower's right," Banks says. "If you meet the eligibility criteria, you cannot be denied a deferment. Forbearance, on the other hand, is granted at the lender's discretion."
You'd apply for a forbearance when you don't qualify for a deferment but would still like to delay your payments up to 12 months. Keep in mind, however, that unpaid interest during this time may be added to the principal balance.
"I always recommend never forbearing; it's worse than credit card debt," Wrenne says. "There are so many negative things that happen behind the scenes."
Perhaps the biggest "gotcha" of forbearance is the fact that interest is capitalizing during this time. This has a domino effect, increasing the accrued interest in the following year and potentially adding it to your principal balance. In a nutshell, you end up paying interest on interest. On top of that, forbearing your loans means you'll miss out on a desirable tax deduction: up to $2,500 (as of 2017) in interest paid on student loans can currently be used to reduce your adjusted gross income if your modified adjusted gross income is within certain limits.
"It's a really good benefit," says Kantrowitz. "It can save the typical borrower a few hundred dollars on their federal income tax returns." But if you're not making payments, you won't be eligible.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.