This is a guest post from Drew Cloud over at The Student Loan Report.
For millions of Americans, borrowing from federal or private student loan providers is a necessary component of attending a college or university to earn a degree. Nearly 70% of all graduates leave school with a student loan burden, averaging more than $35,000 per individual. In 2016, the Federal Reserve Board reported more than 19% of borrowers owe $50,000 or more in student debt – a financial obligation that represents more than a car purchase or a down payment on a home. Given that the student loan crisis continues to impose a financial burden on borrowers, it is important to current students and graduates to understand the best practices for managing student debt for the short- and long-term.
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Use Your Grace Period
The majority of student loan servicers give borrowers a grace period between graduation and when repayment begins, typically no more than six months. Although there is no payment due during the grace period, a handful of things can be done to set yourself up for success throughout this time. If you have a steady income shortly after graduation, get in the habit of making a month payment even when the amount due is $0. This tactic helps pay down interest so that it is not compounding and ultimately costly more over the life of the loan. Additionally, it is beneficial to use the grace period as a time to work through the following best practices to prepare for what’s ahead.
Understanding What you Owe
Whether you are a recent graduate or you have been out of school for some time, having a clear understanding of what you owe back in federal or private loans is key to your repayment success. Several different types of student loans exist, each with varied payment plans, interest calculations and compounding, and provisions should you get into a financial bind, making it necessary to know what you’re up against. Additionally, student loans may be held with different servicers which could lead to missing a payment early on in the repayment process. Start by finding your student loans through this site, or by pulling your credit reports to see which company is servicing your private loans. Take the time to learn about your student loans and how they work before you enter into repayment. Then you can set a goal for yourself!
Know Your Payment Options when Managing Student Debt
Federal student loans come with a handful of various repayment programs, including standard, graduated, extended, income-sensitive, and income-driven plans. There are also options in both the private and federal sector. Federal options are fairly varied and pertain to federal loans. Each repayment option has different stipulations and qualification criteria of which borrowers need to be aware. While having a lower repayment plan like an income-drive option may work better with your budget initially, over the years it takes to repay the loan in full, you could be spending thousands of extra dollars just for interest payments.
Private student loans do not typically have alternatives to standard or extended repayment amounts, so it is important to understand how the monthly payment may impact your budget in the future. If you are creditworthy, the option of refinancing student debt with a private lender may be available. Just like federal repayment options, this takes some research; luckily, there are plenty of resources online that are specifically meant to simplify the refinancing process.
Create – and Use – a Budget
One of the best things student loan borrowers can do to manage the repayment of student loans is creating a budget. Understanding what is available from income each month as well as both required and desired expenses in the same period allows you to recognize if there is a shortfall or a surplus. If you add in your student loan payment to other expenses, like rent, a mortgage, credit card payments, and groceries, and you have little to no cash left over, it may be worth revisiting your repayment options to help ease the pressure. If there is a surplus of money after all expenses are paid, you could think about paying an additional amount toward your student loan balance each month to expedite repayment. Budgeting can be done manually with the help of a journal or spreadsheet, or you can look at online options that provide budgeting assistance and monitoring.
Although student loans can seem daunting at any point during the repayment process, there are steps you can take to ensure you’re setting yourself up for financial success. If you are a recent graduate or still in school, plan how you will make the most of your grace period either by learning about your loans or paying what you can before a minimum payment is due. Make sure to understand the details of each of your student loans, along with the repayment plans available that help monthly obligations fit neatly into your budget. And, most importantly, know what you can afford each month and adjust as necessary.
Drew Cloud started The Student Loan Report when he found it difficult to find student loan information in one place. He now regularly writes about the latest student loan news as well as advice articles for those in college as well as for graduates working to repay their debt.
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