Student loans: 5 steps to pay down your debt

Posted by wanpinfo in Blog

Jun
21

Student loans should be paramount in your mind if you’ve recently graduated college. The school halls are empty, the weekly speeches for your English class are complete, and you’re cleaning up after your graduation party. Now comes the hard part: paying for the education that you’ve just completed. Where to begin? Collect all your loan paperwork and then follow these five smart steps to paying off your student loans.

1. Break it down

Student loans can be daunting at first glance, but the more you can compartmentalize the process, the easier paying them down gets. The first step is to break down your student debt into three sections: federal loans, private loans, and loans that may be eligible for loan forgiveness. It’s important to keep these separate, especially if you are trying to save money through loan forgiveness or consolidation.

Once you’ve separated out your student loans, it will be easier to prioritize your debt. When paying off debt, pay off your credit card debt first (this debt is the most expensive). Next, pay off your loans from private lenders. These loans typically have a variable interest rate. Even though the current variable rate is low, this could change dramatically as the economy improves. Then pay your federal loans. This will give you the most savings long term.

When setting up your repayment, you can get a slightly lower rate if you opt for automatic payments to be deducted from your bank account. Using your tax refunds (don’t forget to deduct your student loan interest) or taking a part-time job are good ways to pay down your student loans.

2. Look for forgiveness

Loan forgiveness is definitely an option worth considering. There are many public service fields and some teaching positions that allow for loan forgiveness after working in the field for a period of 10 years. During the period you must make 120 payments on your loans after which the balance will be forgiven. You can also do volunteer work to pay down debt. AmeriCorps, the Peace Corps, and Vista all have programs that qualify for loan forgiveness.

3. Weigh consolidation

Loan consolidation can make repayment easier: You have a single loan to repay vs. many. Your interest rate will be a weighted average rate of the loans you are consolidating. But students beware; you cannot consolidate federal loan debt and private loan debt. And if there’s a chance you’ll work in a field where loan forgiveness is possible, those loans eligible for forgiveness shouldn’t be part of your consolidation options.

Say, for example, you took out a Perkins loan that is eligible for forgiveness. If you consolidate that Perkins loan (federal) with your Stafford or direct loans, you lose your ability to have the loan forgiven. It is no longer a Perkins loan.

4. Create a budget

You need to find out how much you have each month to service your loans. Tally up your income and your outgo. Look at your spending habits and see if there are ways to trim expenses. Because most students live pretty cheaply out of necessity, try to continue living as reasonably as possible once you land a job. The more extra income you can funnel into loan repayment, the less your debt will cost in the long run.

5. Choose a repayment option

Once you know how much you have to spend monthly, consider your repayment options. For federal loans there are a few options to check out:

- The standard repayment (10-year repayment) – Graduated repayment (starting with lower payments with gradual increases every two years)

- Extended repayment (25 years to repay, with lower monthly payments but higher total interest costs)

- Long-term repayment (30 years to repay, which lowers monthly payments even more but is the most expensive option because of the added interest costs)

- Income-based repayment (a payment amount proportional to your income and family size)

- Income-contingent repayment (the repayment amount is calculated each year based on your adjusted gross income, family size, and total amount of your debt.

Source: http://www.csmonitor.com/Business/2012/0619/Student-loans-5-steps-to-pay-down-your-debt/Choose-a-repayment-option