How to make your first student loan payment
The first student loan bills are coming soon for new graduates. If you are able to stick to the standard plan, you will be making monthly payments for the next 10 years and be done with it.
But not all borrowers will cancel their loans this quickly. Among federal loan borrowers who started taking on debt in 2003-2004, only 1 in 4 had paid off their debt in 2015, according to the most recent data from the National Center for Education Statistics. As for the students who still had debts, around 39% were still in the process of repayment.
This year’s recent graduates can improve their chances by making a plan now to pay off debt and stay on track to move forward, no matter what obstacles arise.
“A plan will alleviate the stress you feel when you don’t know what life is like after college and have this debt to pay,” says Tracie Miller-Nobles, Associate Professor at Austin Community College and Fellow of the American Institute of CPA’s Consumer Financial Education Advocates.
Here’s how to create a strategy.
Get details on all loans
Don’t wait to find out how much money you owe. Your bill may not arrive before your first due date, according to student loan experts.
“Just because you don’t get a bill doesn’t mean you don’t owe money,” says Betsy Mayotte, president and founder of the Institute of Student Loan Advisors.
For federal loans, go to student help site or the National Student Loans Data System. To find private debt, visit annualcreditreport.com for a credit report, which lists private loan debt and the lender.
Once you know who holds the loans, call them to verify or update your contact details. You can also create an online account to track payments.
Find the right repayment plan
Your repayment goal should be to pay as little as possible over time, says Mayotte. This is because the more you pay off the loan, the more interest will accrue. For most borrowers, the standard 10-year repayment plan is the cheapest option.
For others, it may mean continuing a loan forgiveness program, like Public Service Loan Forgiveness, which cancels federal debt after making 120 payments on a loan. income plan while working full time for the government or a qualifying nonprofit organization.
High incomes can repay loans faster by asking their manager to apply additional payments to their loan balance.
It is the borrowers with modest incomes or with uncertain employment who have to think about it.
“There are many options and borrowers tend to be confused or distracted because there are many options that are not that drastically different,” says Abril Hunt, Outreach Manager for ECMC, a nonprofit focused on student success.
Hunt recommends borrowers who can’t make payments on the Standard Plan to try Review Payment As You Earn, or REFUND. This is the income-based repayment plan that all graduates with federal loan borrowers can enroll in.
An income-based repayment plan, like REPAYE, fixes payments at a portion of your income, which can help fit them into your budget. You will need to recertify your income each year. If you lose your job or don’t have one yet, your payments could be as low as $ 0.
Once you’ve selected a plan, make sure you never miss a payment. Sign up for automatic payment, but make sure you have enough money in your bank account to cover these direct payments.
Automatic payment can also save you money: all federal student loan services and most private lenders will reduce your interest rate by 0.25 percentage points when you sign up.
Have a plan if you run into problems
If the worst happens – a costly medical emergency or job loss, for example – contact your repairman or lender as soon as possible. They can help you develop a short-term reduced payment plan, sign up for an income-tested refund, or request a temporary deferral.
Suspending payments for a short time can give you leeway. But interest can keep going up, so try to pay the interest during this time to avoid higher debt.
Reassess every year
Your instinctive move might be to choose a plan with the lowest possible payout, Mayotte says.
“It might be the right thing to do for your first loan repayments, but as your income grows and your life situation changes, you don’t want to leave it on autopilot,” she says.
Set an annual reminder to reassess your repayment strategy. It could be tax time or when you recertify your income for an income driven plan.
This article was written by NerdWallet and was originally published by The Associated Press.