Student Loans: How Do I Pay Them Back?

May 19, 2016
Adrienne H., Financial Expert

If you just received your college diploma, you are most likely among the many graduates with tens of thousands of dollars in federal student loan debt. That means in about six short months, whether you have a job or not, you’ll have to start making repayments. As the average 2016 graduate with debt has about $37,000 in student loan debt, it is understandable that you’re stressed—that much debt is hard to fathom! Before you have a breakdown, or even if you already did, know that there are many options to give you flexibility when repaying your loans. Let’s take a look at a few of your possibilities.  

Getting Started
When it comes to federal loans, the most basic and common option is the Standard Repayment Plan. This 10-year plan of 120 equal payments offers the shortest amount of payment time and lowest interest accrued compared to all other plans. It is important to know that Standard Repayment is the default plan. This means if you don’t select another option before your first payment, you will automatically be put on Standard Repayment.

Spend Less Now
As a young professional, you have options about how to approach your student loans with an entry-level salary and additional financial obligations that come with independence. If you’re worried about not having enough money to get by month to month, consider a more flexible plan with lower monthly payments. In fact, consider reevaluating all of your expenses to see how you can cut costs and spend even less! A lower monthly payment might sound nice; however, understand that you will more than likely be in debt longer and pay significantly more in interest overall.

Give More, Pay Less.
By contributing more money than the minimum payment each month, you could save thousands of dollars in interest. Plus, you’ll be on the fast track to having no student loan debt! This may seem like the most ideal plan, but there are some other factors to think about. 

When deciding whether or not to pay off your student loans early, assess your entire financial situation. For example, if you have another loan with higher interest, it’s a good idea to focus on paying that off first. Additionally, student loans are tax deductible, so you could miss out on this tax break if you pay your loans back early. On the other hand, your tax deduction over the years will probably not save you more money than what you’ll save in interest with a quick repayment plan.

Build Good Credit and Lower Your Interest
To avoid late fees and getting behind on loan payments, you can set up auto pay to ensure your payments are on time. Automatic payments can help you stay on the right path, are convenient, and often come with perks. If you enroll in automatic payments, many lenders will reduce your interest rate and it’s a great way to build good credit. Although automatic payments might seem like a perfect solution to handling your finances, you are still at risk for unexpected fees. Make sure you have enough in your account to cover your student loan payments each month. Not having enough in your account could result in late fees from the lender and overdraft fees from your financial institution.

Ask for Forgiveness
Student loans are not easy to get rid of, but if you’re in need of extra help after 120 qualified payments, student loan forgiveness could be an option. The Public Service Loan Forgiveness Program grants full-time employees in government, not-for-profit, or other service jobs to have the remaining balance of their Direct Loans forgiven. Please note: this is a new program established by Congress and will not be available until October 2017.

Don’t Dig Yourself A Deeper Hole—Seek Advice
If all else fails, ask your lender for help. Debt is confusing and frustrating, and if you’re struggling to pay your rent or put gas in your car, it can be tempting to ignore your student loans and hope they’ll disappear. Reality check! Avoiding your loan payments has severe, long-term consequences that could affect your financial abilities, such as obtaining a house, insurance, and even your tax refund. By talking to lenders, they will help you explore more affordable options and possibly identify other factors affecting your financial situation.

The options discussed are only a few suggestions and should not be considered financial advice. Remember, all financial situations are different and further research may be needed. If you have questions or need help making a plan, consult a financial professional. 

Tags: Financial Faceoffs, Money Management, Borrowing Money