4 Steps To Creating a Student Loan Repayment Plan
You spent your college years studying hard, learning a lot, and having some fun. Now you’re out of school, and it’s time to face reality – and for many graduates, that reality includes student loan debt. Unfortunately, with today’s high cost of college, you may have accumulated a lot more student loan debt than you had expected, and dealing with it all can be somewhat confusing. As this article explains, if you’re dealing with multiple lenders, and different interest rates and balances on multiple loans, managing all of this can be challenging and stressful.
In this post, we’ll share some tips for figuring out which loans to tackle first, and how to devise a strategy to pay off your student loans more efficiently.
Step #1: Start With Private Loans
Not only do private loans often have less flexibility, but they may also have higher interest rates. They also don’t offer the loan forgiveness or income-based repayment options that many Federal loans do. Your only option may be a fixed minimum payment, which may be fine right now while you’re young and don’t have as many expenses, but eventually, when you’re buying a house or starting a family, this lack of flexibility may pose a problem. This is why, if you have private student loans, it’s a good idea to focus on paying these off first.
Step #2: Be Strategic With Federal Loans
While you’re focusing on paying off your private loans, remember that you still have to make payments on any Federal loans you have as well. But since you have more flexibility here, you can create a more strategic plan that works for you. For example, you might just want to make the minimum payments on your Federal loans until your private loans are paid off, and then roll the private loan payments towards the remaining Federal loan balances.
If you don’t have any private loans, you have several options for how you may repay your Federal ones. For example, a 10-year repayment plan will have you out of debt the fastest, but if you’re not making much money yet, or are struggling with your loan payments, you may opt for an income-based repayment plan. Since you do have some flexibility here, you should take advantage of it if you need to, but don’t put off paying these loans off sooner if you are able. Remember that debt is debt. The sooner you can get rid of it, the better!
Step #3. Look Into Student Loan Refinancing
If you have both Federal and private student loans, you are dealing with multiple lenders, multiple interest rates, and multiple payments, which get very confusing and frustrating. In this case, refinancing your student loans can be a good option, if you qualify. Most lenders will require you to have steady employment and a reasonable amount of income, as well as a good credit score, but if you qualify, you may be able to both reduce your interest rate, and consolidate all of your loans into one monthly payment, which will make them much easier to manage.
Different lenders may have different criteria and interest rate offers, so do your homework and shop around a bit before choosing to refinance. If you have a lot of high-interest private loan debt, refinancing your loans could save you thousands of dollars.
However, if you don’t have any private loans, you may not want to refinance, as the refinanced loan will not carry the benefits that Federal loans do in terms of income-based repayment options, etc..
Be sure to consider your options carefully when deciding whether or not to refinance, but for some, this can be a great option.
Step #4: Make A Plan
There are several methods you can use to pay down your student loan debt more efficiently. (These are also good methods for dealing with credit card debt.) Here are a couple of ways to do it – you can choose whichever works best for you.
- The Debt Avalanche Method: Start with your loan with the highest interest rate, and pay as much as you can towards this loan, while making the minimum payments on each of the others. When one is paid off, move to the next highest interest rate, etc.. If you have a lot of high-interest student loan debt, this can end up saving you a lot in interest charges.
- The Snowball Method: Start with your smallest loan balance first, and pay the minimum amount on each of the others. Once the first loan is completely paid off, “snowball” the payment you were making on that one into the payment you are making on the next smallest loan. This method can provide great motivation, as you will see that you are making progress on eliminating your debts, instead of focusing on all of the loans at once and feeling frustrated or hopeless.
Finally, remember that student loan debt, while it may seem overwhelming at times, will be a lot easier to manage if you have a plan.
To recap, make sure to focus on private loans first if you have them, continue making minimum payments on your Federal loans according to a repayment term that fits your needs, consider refinancing, and choose the debt snowball or avalanche method to get your loans paid off as quickly as possible.
And once they’re paid off, don’t let that money you’re saving slip through your fingers! Contact us to learn how you can build a solid financial plan to finance your own purchases throughout your lifetime, without racking up more debt…