These days it's hard to get through college without borrowing money. Tuition increases, degrees that take longer to finish and the high unemployment rate for young adults are all conspiring to raise our collective college debt. If your debt's beginning to feel like a boulder you roll up a mountain every day just to have it roll back over you in the morning, close your eyes and take a deep breath. We can't make that boulder stop rolling, but maybe we can give you some tips -- in more or less chronological order -- for shrinking it down a bit.
Some of these tips are things you can do before you graduate. Paying -- and paying close attention to -- your student loans from the moment you take them out can help you avoid late fees, interest increases and damage to your credit rating, all of which can help to keep your payments affordable.
Keep up with your loan amounts and know what your monthly payments are going to be while you're still in college. It's the only way to plan for how you'll pay the debt back, and it will keep you from receiving any unpleasant surprises about how much you owe. Only borrow as much money as you need for tuition and fees. Remember, this is not an unlimited party fund to be spent however you please. You're taking out loans that must be repayed. Don't borrow the maximum just because you can.
Once you've graduated, keep up with your lenders, loan amounts, monthly payment amounts and length of time until payoff for all of your loans. Your government loans can all be tracked at the National Student Loan Data System's website [source: NSLDS]. Tracking your payments, not just loan amounts, is important too, especially if you're making additional payments or paying additional principal each month. You want to be sure the money is allocated correctly so you can watch those loan balances fall quicker.
All student loans have grace periods -- the time between when you take out a loan and when you must begin paying it back -- which vary based on the loan. For government loans, you generally have six to nine months after graduation before you must make a payment.
Meanwhile, suppose you have a job in college, get a job immediately after college or come into a wad of cash. It's OK to make payments before the grace period ends. Even if you can't make full payments or make a payment every month, you can pay on the interest, which, depending on your loan, may begin to accrue before you finish school.
Plus, getting in the habit of making payments as soon as you can means you'll be that much farther ahead once the actual loan repayment period begins. Whether you make early payments or not, know what the grace period is for each loan you have. You don't want to miss the first must-pay payment.
Once you graduate from college, or if you move during the loan repayment period, let your lenders know your new address, phone number and e-mail as soon as possible. Most loan information will be e-mailed to you, but it's a good idea to be sure lenders have up-to-date contacts so you don't miss anything important. Open any e-mails or letters you get from lenders right away.
Missing payments because you missed the bill is not an excuse and will cost you money. If you're having trouble making loan payments, don't ignore requests from lenders for payment. Contact the lender about your problems and learn what your options are.
While you're still in school, consider getting a job -- if only part-time or during summers. You'll be able to save money, pay a portion of your own way through college -- which means fewer student loans -- and begin to pay back the loans you already have.
College is also a good time to look seriously at the types of careers you're interested in or will be qualified for with your degree. Ask yourself these questions, related to your student loans:
- How much salary can you expect in this field?
- Are you taking on too much debt relative to the income you can expect?
If you don't like the answers, the time to make changes is now, because once you've graduated from college, the clock is ticking on the grace period for your student loans.
Create a budget while you're in college. Start with fixed expenses like rent, utilities and phone, then add things that might be more flexible, like food, gas, fun and savings -- not necessarily in that order. If you can, add the student loan to your budget and begin to pay it down.
Look for ways to save or see if you can get more hours at work. If you earn extra money, put it toward your loan. The faster you can pay down the principal, the less you'll have to pay in interest over the life of the loan. If you don't have experience with budgets, look online. There are many templates to be found.
When you have the money to pay off or pay down one of your loans ahead of time, choose the one with the highest interest rate. It's costing you more every month than loans with lower rates. If you have both government and private loans, pay off the private loans first. They often have higher rates and less flexible repayment options than government loans.
Get familiar with your loan documents. Some lenders -- though not most -- charge a penalty for paying loans off early. And many lenders require you to request that extra payments be put toward the principal, which will reduce your overall interest payments. With some loans, extra funds are automatically put toward future payments unless specified otherwise.
Set up auto-debit to have payments made automatically from your checking account on the days you receive a paycheck. Enrolling in auto-debit will often reduce your interest rate by 0.25 percent, saving you money that way as well. If you have a job, are paid biweekly (every other week) and make loan payments biweekly, you end up making an extra payment every year, saving money on interest in the long term.
Consider putting a raise, a bonus, your birthday cash or an inheritance toward your student loan as well to help reduce your principal, which will in turn reduce your interest. You'll be one more step closer to financial independence.
Read your loan documents carefully. You may need to include a written request that the extra payments be put toward the principal, not toward future payments. You'll also want to check with the lender to be sure there are no limits on payment frequency.
You may be able to deduct the interest on your student loans from your federal income taxes. To be eligible for the deduction, the IRS says you must meet some requirements. And because the IRS has a particular way of phrasing things, we'll just pass along those requirements here in their own words [source: IRS]:
- You paid interest on a qualified student loan in the current tax year;
- You are legally obligated to pay interest on a qualified student loan;
- Your filing status is not married filing separately;
- Your modified adjusted gross income is less than a specified amount, which is set annually; and
- You and your spouse, if filing jointly, cannot be claimed as dependents on someone else's return.
Because tax laws change often, check with an accountant, tax preparation specialist or the IRS to determine if you're eligible to take the deduction.
If you run into problems and have trouble paying back your loan, contact your lenders. Programs are available to help keep you from defaulting. Here are a few of the more common ones.
A consolidation loan bundles your student loans into one loan, with one monthly payment and one interest rate. While it is possible to consolidate both government and private loans, it's not generally a good idea to consolidate government loans into a private loan. When you do, you give up access to government programs -- deferment or forgiveness -- you might need if you get into financial trouble down the road.
Loan deferment, which means payments are halted for a period of time, may be granted for specific reasons. For example, you can apply for an unemployment deferment, which stops payments until you have a job. But beware: Interest may continue to accrue, meaning the longer you defer, the more money you'll owe.
When you can't make payments but don't qualify for a deferment, you may be able to receive a forbearance, which would allow you to make reduced or no payments for up to 12 months. Interest will accrue during the period, so if you can make any payments at all, you'll be better off in the long run.
Forgiveness of government loans is sometimes possible if you work in certain fields, work for certain government or nonprofit agencies or serve with AmeriCorps or the Peace Corps. Get in touch with your lenders for more information about these options.
Loan default -- which is what can happen if you don't make loan payments for a set number of months -- is a serious problem that can haunt you for the rest of your life. It can keep you from getting a loan to buy house. It can increase the interest rate you must pay on car loans and credit cards forever, which means you end up paying much, much more for things that should have cost you less. It can also make it harder for you to rent an apartment, sign up for utilities or even get a phone plan.
Default times vary depending on loan types. If you're having trouble making your payments, take a look at your loan documents to see how many months you can miss before you're in default. Before that happens, contact your lenders about deferment, forbearance or consolidation options.
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Author's Note: 10 Tips for Repaying Student Loans
Student loans aren't the only debt that if ignored can wreck your life and credit. Defaulting on credit card debt, mortgages or car loans will also have ramifications that might follow you around forever. If I could go back and tell my 25-year-old self one thing about money, it would be to start saving now. Saving money is hard -- if it wasn't, there wouldn't be so many how-to books and articles written about it -- and I've not been as good about it as I should have been. Save money every month, I'd tell myself, even if it's only a little bit. Save for the long-term and short-term. It will offer peace of mind in middle age and can keep you from worrying about defaulting or running behind on credit cards, rent or mortgage, car loans or student loans.
- Internal Revenue Service (IRS). "Student Loan Interest Deduction." Aug. 18, 2014. (Oct. 11, 2014) http://www.irs.gov/taxtopics/tc456.html
- Kane, Libby. "17 Tips For Quickly Paying Down Student Loans, From Someone Who Paid Off $74,000 In 2 Years." Business Insider. May 20, 2014. (Oct. 11, 2014) http://www.businessinsider.com/how-to-pay-student-loans-faster-2014-5
- College Money Insider. "10 Tips for Paying Back Your Student Loans." Overture Technologies. Aug. 28, 2014. (Oct. 11, 2014) http://www.overturemarketplace.com/10-tips-for-paying-back-your-student-loans
- The Project on Student Debt. "Top 10 Student Loan Tips for Recent Graduates." (Oct. 11, 2014) http://projectonstudentdebt.org/recent_grads.vp.html
- Federal Student Aid. "Deferment and Forbearance." U.S. Department of Education. (Oct. 11, 2014) https://studentaid.ed.gov/repay-loans/deferment-forbearance#what-is-forbearance
- Federal Student Aid. "Understanding Default." U.S. Department of Education. (Oct. 11, 2014) https://studentaid.ed.gov/repay-loans/default
- National Student Loan Data System (NSLDS). "FAQs." U.S. Department of Education. (Oct. 11, 2014) https://www.nslds.ed.gov/nslds_SA/SaFaq.do