It’s that time of the year: Graduation is right around the corner, and you’ll soon be free to pursue the career of your choice.
This is an incredibly exciting time for students across the country, but it can also be very stressful. Graduation means that it’s almost time for you to start paying back your loans. For most federal student loans, you have to start making payments six months after you graduate.
According to The Institute for College Access & Success, 65% of students from the Class of 2017 had student loan debt and graduated with an average of $28,650 in student loans.
For an unemployed student fresh out of school, it can be intimidating to face this much debt. And that grace period will increase your loan amount if you have an unsubsidized loan.
How do you even begin to tackle your student loan debt? Never mind other debt from credit cards, auto loans, etc.
If you’re on pace to graduate in the coming weeks, let’s take a look at how you can prepare to repay your student loan debt.
Evaluate Your Payment Options
First and foremost, you need to evaluate your payment options.
Lenders, federal and private, understand that the majority of students aren’t able to tackle their debt all at once after graduation. Lenders and federal loan servicers offer a variety of repayment plans to help you repay your debt on a manageable schedule.
For example, if you took out any federal student loans, you will likely have to deal with FedLoan, Nelnet or Navient in order to pay back your debt.
These servicers offer several repayment options to accommodate students of all income levels. The standard repayment plan is a fixed-payment plan to pay your entire balance over 10 years.
Students who can afford it can also make additional payments, which are applied to the principal balance in order to save on interest.
Lower-income students may even qualify for a repayment plan that starts at $0/month and grows with your income.
The takeaway here is that you don’t need to be too concerned if you can’t afford high monthly payments. Lenders want their money as quickly as possible, but they understand that most recent graduates don’t have a high stable income.
If all else fails, and you aren’t able to find a suitable repayment plan through your lender’s website, call and explain your financial situation. Lenders will almost always be willing to work on a solution that works for both parties. Be wary of refinancing your federal student loans as the federal government tends to have better repayment options than private lenders.
Look at Your Other Debt
Student loan debt is difficult to deal with on its own. It’s even more difficult when you have to deal with debt from other sources.
In order to effectively prepare for student loan repayment, you need to account for other debt.
It’s common for unemployed students to rely on credit cards to pay for a large portion of their living expenses while in school. As a result, they graduate with thousands of dollars in credit card debt in addition to student loans.
In most cases, credit card debt carries higher interest rates than student loans.
Meanwhile, federal student loan interest rates are much lower. For example, the interest rate on Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduates is fixed at 5.05%.
If you are carrying a credit card balance or other forms of high-interest debt after graduation, it might be in your best interest to prioritize this debt during your grace period.
Paying off high-interest debts while making the minimum payments on your student loans could save you thousands when it’s all said and done.
Start Making Payments Early
It might not be an option for everybody, but, if possible, you should start making payments on your student loans during the six-month grace period after graduation.
If you qualified for a federal subsidized loan, you won’t be responsible for interest until you graduate. While in school, the government pays the interest on your loan.
If you are able to make payments toward your loan before interest starts to accrue, the money will be applied to the principal balance—saving you a lot of money in interest.
Unsubsidized loans begin accruing interest on the day that the loan is disbursed. In this case, making early payments can help wipe away the interest that accrued while you were in school so that you can start tackling the principal balance.
Student loan debt can be very intimidating for most students. But, if you start planning now, you’ll find that repaying your student loans is much more manageable than you previously thought.
Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.
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