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The A-to-Z Guide to Repaying Your Student Loans

July 9, 2015
Loans, Student Loans
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When Tyler Williams graduated in 2009 with nearly $30,000 in student loan debt, he wanted to rid himself of the burden quickly.

“That anxiety gave me this laser focus to pay off that debt,” he says. “I just found that fire and stuck with it.”

The University of North Carolina at Chapel Hill alum found a full-time job in New York City, but an entry-level salary coupled with sky-high rent wasn’t making it easy to pay off his debt. So he set an aggressive budgeting strategy to combat his loans.

“I would always pay double the minimum,” he says. “Doing that wasn’t always easy. It’s a lot of being thrifty — not buying a lot for myself, not going out for drinks or buying lunch with people … and taking meager vacations.”

Williams freelanced on the side and used bonuses to increase his monthly payments.

“As tempting as it was to play with that extra money, I threw all of it at my loans,” he says.

Williams, now a public relations and social media manager at Alterna Professional Haircare, found himself debt-free three years later. It’s an enviable position.

Seven in 10 college students today graduate with student loan debt, according to a November 2014 study from the Project on Student Debt.

In the class of 2013, borrowers owed an average of $28,400, up 2% from the $27,850 average for the class of 2012, according to the study. While some state averages were as low as $18,650, in six states the average debt was more than $30,000.

College graduates with standard 10-year repayment plans will end up paying thousands of dollars in interest that can prevent financial mobility for years to come.

Here’s an example: If you had $30,000 in student loans at a fixed interest rate of 4.29% (the current fixed rate for a federal Stafford loan), you’d pay a total of $6,946.48 in interest over 10 years. If you paid the loans off in three years, your interest would total $2,025.42. That’s a savings of $4,921.06. The faster you pay off that debt, the less money you’ll end up spending in the long run.

Create a realistic budget — and stick to it

Paying back loans more quickly means creating a realistic budget. Take into account your total debt along with other monthly expenses, and then factor in your income sources.

Creating a budget that includes a hefty payment toward your loans may mean living frugally and using any additional income to pay the loans. It also may mean not taking out any other loans or racking up credit card debt.

Zina Kumok started a blog, debtfreeafterthree.com, after paying off $28,000 in student loans in three years on a $30,000 annual salary. She split living costs with roommates, avoided accumulating credit card debt and held onto her 1999 Toyota Avalon instead of upgrading to a new car.

She threw every cent she received toward her loans, including every raise at work.

“If I got birthday money from my grandma, that went toward my loans. If I made extra income freelancing, that went toward my loans,” Kumok said. “I didn’t try to get a second job or hustle on the side, so when I did get an unexpected windfall, I put it toward my loans.”

Pay more than the minimum

Paying only the monthly minimum on your loans ensures your payments will drag out for years, and you’ll pay more interest in the long run. Making larger and more frequent payments will lower the principal balance and reduce interest, says John Heath, directing attorney at Salt Lake City-based Lexington Law.

Making higher monthly payments takes “great willpower” for Alex Birkett, an Austin-based content strategist for lawn-care provider LawnStarter. Birkett graduated in spring 2014 from University of Wisconsin with $30,000 in debt. His strategy for getting debt-free: paying three times the minimum each month.

“I tell myself I’m saving thousands in interest in the future, and that makes it easier to contribute more than necessary.”

Find the right loan repayment option for you

Even if you want to pay off your loans quickly, it may not be the best option for you, depending on your financial goals.

There are several repayment options for federal loans:

  • Standard repayment. You’ll pay a fixed amount of at least $50 a month over a period of 10 years.
  • Graduated repayment. You’ll pay less at first, and your monthly payment will increase every two years.
  • Extended repayment. You’ll pay a set amount over a period of up to 25 years, instead of the standard 10 years. You’ll also pay more in interest over time.
  • Income-driven repayment. There are multiple income-driven repayment plans, each with slightly different terms. Under these plans you’ll pay a percentage of your monthly discretionary income or your annual income, and your payments will change as your income changes. If you took out loans after July 1, 2014, and you opt for income-based repayment, for instance, you’ll pay 10% of your discretionary income each month toward your loans. Your remaining loan balance will be forgiven after 20 years.
  • Loan forgiveness. Graduates working in public service — like teachers, nurses, military personnel, police, firefighters, or AmeriCorps or Peace Corps volunteers — can qualify for Public Service Loan Forgiveness (PSLF) after 10 years of payments. Sign up for an income-driven repayment plan while you’re paying off your loans to maximize your savings under PSLF.
  • Consolidation or refinancing. You may also choose to consolidate or refinance your loans once you’ve graduated to simplify the repayment process. Consolidating bundles your federal loans into one and gives you a single monthly payment and interest rate, making your loan payments easier to keep track of. The government will give you a new interest rate, which is the average of each of your prior loans’ rates.When you refinance, a private company will replace your prior federal and/or private loans with a single new loan, which carries a new interest rate and monthly payment. Refinancing takes your credit score and income into account and, if you qualify, may lower your payment and interest rate over the life of your loan. Keep in mind that if you refinance your federal loans with a private company, you may lose the flexible repayment options and deferment, forbearance and forgiveness protections that federal loans offer.

    If you have private loans, contact your lender to research what repayment choices are available to you. That’s especially important if you realize your income after graduating may make your loan payments difficult to manage.

    Estimate your refinancing savings

No matter what plan you choose—or how much time you take to pay off your loan—the worst mistake to make is ignoring the debt altogether, advises Erin Ellis, financial educator at Philadelphia Federal Credit Union.

“Just because you’re only confronted with it once a month when the bill arrives doesn’t mean the debt isn’t there the other 29 days of the month,” she says. “It’s important to keep your student debt in front of you.”

This article was written by NerdWallet and was originally published at USA Today.

Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

 

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