Paying Off Your Student Loans

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I recently had a conversation with someone about whether or not her son should go to college. With the rising university fees and a rapidly adapting job market, it’s a tough decision that parents face. Nonetheless, a college education brings invaluable knowledge and experiences, and it isn’t something that should be written off just because of the costs.

 

If you’re dealing with your own student loans or you’re about to start college and enter this world of debt, don’t panic. While there’s nothing fun about owing $100,000+ to a lender, it’s a situation that can be managed if you take the right steps. Even if you don’t land a seven-figure job right out of college, you can still tackle your loans and get your career on track.

Get Started Early

After graduating, most people have a grace period before they have to start making monthly payments to their lender. In theory, this window is to give you time to get a job, though some people go straight from college into unpaid internships. Whatever your career path requires,it’s important that you prepare to pay as soon as the grace period ends. If you procrastinate on your repayment plan, you could see your interest rate go up immediately, and high interest on a huge balance is bad news. If the interest rate on your loans goes up by just one percent, you could lose thousands of dollars each year.

 

Once you start making your payments, you might be tempted to extend the repayment period so you can lower the amount due each month. I understand that some people have no choice, but you need to at least be aware of how much this can cost in the long run. If you take $200 off your monthly tab and extend your window from 10 to 25 years, you’ll probably end up paying around $20,000 more in interest. That’s enough money to buy a decent car, and that’s in addition to the student loan debt you had already accrued.

 

Again, I know firsthand how difficult it can be for someone fresh out of college to start tackling monthly payments in excess of $500. If you’re forced to extend the repayment window, that’s a far better choice than defaulting and ruining your credit. You can always increase your monthly payments later on and start cutting back on that miserable interest.

Paying Principal

If you’ve borrowed $80,000 during the course of your college career, it might be difficult to pay anything beyond the minimum monthly amount. However, whenever you do have a little extra cash laying around that you can throw at your debt, it’s in your best interest to do so. Unfortunately, lenders love applying your extra funds to fees and upcoming payments. This lets your principal balance remain as is, which leads to more interest payments in the future.

 

How you handle this situation will depend on the terms of your loans and the policies of your lender. If you pay a little more than the minimum and notice that those funds are just going toward future payments, give your lender a call. At the very least you’ll get some clarity(I’ve noticed lenders take a lot of pride in not being clear), and in some cases you might be able to have the extra payments applied to your principal balance.If your lender is accommodating, one phone call could save you thousands of dollars.

Refinancing

Anyone with student loan debt has received thousands of mailings and a few million phone calls about consolidating and refinancing those loans. For some people, I see this as a great option; there's nothing to be lost by consolidating and saving some money on interest. There are a lot of graduates, however, for whom refinancing isn’t an option. Worse yet, some people are duped into consolidating with a private company when their federal loan program was actually the better choice.

 

If you borrowed federal funds to pay for your education, those loans come with a fair number of benefits. Most people are allowed to defer payments if they resume their education, and it’s also possible to restructure a payment plan based on personal earnings. Private lenders typically aren’t as generous and may try to sneak in some hidden fees that could trip you up later. Before you consolidate federal loans with another company, make sure you’re very clear about what your new terms will be.

 

When it comes to balance transfers and consolidating, I try to remind people that there’s no magic solution to repaying your debt. You can’t simply move borrowed funds around until they disappear;you actually have to make the payments. If you can get a lower interest rate,you absolutely should. Beyond that, your goal should be paying down your balance until it’s gone.

Auto-Pay

The auto-pay feature is there for your benefit. A lot of lenders will even lower your interest rate when you enroll in automatic payments because it’s worth it for them to avoid the follow up calls and collections. However, you need to pay attention to your withdrawal dates and understand that your monthly payment is subject to change.

 

Student loans confuse a lot of borrowers with the repayment structuring, and that’s often because you have several loans in differing amounts from the same company. Looking at your account summary, it’s possible you’ll see any or all of the following:

 

●       Signature Student Loan

●       Stafford Student Loan

●       Consolidated Signature

●       Unsubsidized Loans

 

After signing up for auto-pay, check your account summary to familiarize yourself with the different loans amounts and when each one gets deducted from your account. You also need to read every notice the lender sends out regarding changes in your monthly payment, as I’ve seen those amounts jump around pretty significantly. Auto-withdrawal might take most of the work off your plate, but you still need to understand exactly how it works.

 

Your education is a worthy investment, and student loan debt is often times a necessary part of the process. If you choose to go to college and take on this burden, make sure you have a plan of action for paying off the balances as quickly as possible. By attacking your loans aggressively instead of pushing off payments, you can avoid long-term debt and save a lot of money in the process.

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