Don’t Panic: Student Loan Repayment Checklist

Panic

Congrats, you graduated.  But, now you’ve got student loans to deal with. Don’t Panic.  Below is a checklist to guide you through the steps you should take to find out what your best option is to pay off these loans.  We’ve also asked a few Financial Experts to weigh in.

Meet the Guest Financial Experts:

Radhika Miller is a debt expert at Equal Justice Works, a nonprofit that facilities the ease with which law students and lawyers can transition into public service sectors.

Karen Carlson is a financial expert from Incharge.org, a non-profit dedicated to helping people better understand debt management.

Betsy Mayotte is a director of regulatory compliance at American Student Assistance, a nonprofit that helps college students and alumni successfully manage their debt

Step 1:  Know the facts

The very first step is to understand a few basic facts about your loans.   Go ahead and dig out that loan information sheet that you filled out when you signed the loan and fill out the table below (It is provided with a few examples):

Loan Federal or Private? Amount Interest Rate Variable or Fixed Interest Rate? Effective Date (When do you have to start payments?) Loan Term
Perkins Federal 5,000 5% Fixed 6/20/13  10 yrs
Direct Stafford Federal 10,000 3.4% Fixed 9/4/13 10 yrs
Sallie Mae Loan Private 15,000 8% Variable 9/1/13 15 yrs
_ _ _ _ _ _ _
_ _ _ _ _ _ _

As a first step, Betsy concurs…

…the student must understand who the lenders are and what loan types each holds – she can find out who holds all her federal loans at www.nslds.ed.gov.

As a first step, Radhika says…

Use NerdWallet’s calculator to simulate your long-term situation and see how you may fare under different plans (and to see how you’ll do under specialized plans IBR, you can enter current income, expected income, etc. into the calculators at www.finaid.org). Compare payment amounts and how much you’ll pay over time in each plan. Consider carefully what you can afford now and what you may expect (or be unsure about) for the future.

Step 2:  Prioritize your repayment

The best plan of action to do when considering all your loans is to prioritize payment.

Let’s take a look at the interest rates.  Ultimately, between the federal loans and the private loans, you’ll usually want to pay off your private loans first.   Typically, private student loans have a higher interest rate than the federal loans.

You want to try to minimize the total amount of interest you pay, so paying off a higher interest rate account more aggressively would be your best option.

You ultimately want to lower or postpone your federal repayment.  You can then utilize your money to pay off the higher interest rate loans first.

Step 3:  Utilize Federal Loans Alternative Repayment Programs

If you’re having trouble paying back your loans, you definitely want to look into alternative payment options for federal loans.  Federal loans have very forgiving payment plans that all struggling students should at least be aware of.   Let’s look at what some of those options are:

1. Delay making payments:  Deferment or Forbearance

2. Make lower, more affordable payments: Income Based Repayment (IBR)

3. Work for the government: Public Student Loan Forgiveness

4. Consolidate your Loans

See the full details of the ‘10 benefits of federal student loans’

In Regards to Federal Loans, other experts say…

Karen Carlson says…

This student should begin by visiting loanconsolidation.edu.gov to see  what repayment plans are available for her federal student loans. If she doesn’t have a high salary, she should secure a prolonged repayment structure (15-25 years) with the lowest possible monthly payment. Any savings she achieves on the federal student loans needs to be applied (and then some) to private loans that likely have higher interest rates and less flexible repayment options.

Radhika points out…

If you are unemployed or facing an economic hardship, deferment or forbearance may help, but they are limited and you want to think about the situation you’ll be in afterward. Deferments and forbearances are similar except that interest on subsidized and Perkins loans won’t accrue (it will on other loans). Under forbearance, interest accrues on all loans and capitalizes, so this can make a big difference. Often, borrowers are unaware of how much and how fast their balances can increase when in a forbearance. You should consider whether you can make the payments IBR requires, because if you can, IBR will likely be the better option.

Betsy believes good options are to:

-consolidate the federal loans to extend the term then use income based repayment or another option to get the lowest payment possible
-check out forgiveness options for federal loans such as public service and teacher loan forgiveness

Step 4: Private Loans:  Consider Loan Consolidation

Now that you’ve gone through the options for Federal Loans, let’s take a look at your private loan.

Private loans generally do not have alternative payment plans like federal loans do.   However, one option you can look into is to consolidate your loans, if you have more than one private student loan.

Consider some of the advantages and disadvantages of consolidating your loans:

Consolidated loans enable you to simplify your student loan payments by combining all loans into a single payment. You can reduce your monthly payment by extending the total term of your consolidated loan, however this will lead to substantial increases in interest paid over the full term of your loan. See the “Added Interest” column in the Consolidation Options table to see the increased cost of various repayment plans.

By consolidating all your loans, including private loans, you will not be eligible for a federal Direct Consolidation Loan. You can still consolidate through a commercial lender, but will forfeit the advantages of federal loans, including, but not limited to, deferment and special income-based and public service repayment programs.

You can also use a loan calculator to understand whether consolidation is the right step for you.

In regards to Private loans, the experts say…

Betsy’s general tips for Private Loans are:
-as private loans tend to have higher interest rates and less options, we want to try and pay those down first
-if possible, consolidate private loans under a single lender
- pay as much towards the private as possible monthly

Radhika weighs in on private loans:

If you have private loans and can’t afford payments, talk to your servicer, but also think about the consequences pointed out below with regard to forbearances. If you can negotiate a lower payment amount that is affordable to you, it’s usually better to make some sort of payments than to sit in forbearance. 

 

Eventually, by budgeting and making your payments on time, you’ll be able pay off your student loans and earn your financial freedom.