You did it: You graduated from college — a feat that only one-third of Americans have accomplished.
While that should make you proud, another statistic is probably hanging over your head: the fact that 69% of college students have taken out loans, graduating with an average debt of $29,800.
If you, too, are saddled with student loans, don’t panic. Tens of millions of young Americans have been in your shoes. The important thing is to learn as much as you can about the process — and then create a plan of attack.
So before you even clean out your dorm, accept a job, switch banks, or move to a new city, take these six steps to get your student loans under control.
1. Take Stock of Your Loans
How much do you owe? Who do you owe? Where do you pay your bills?
Every new grad faces these questions because, frankly, the system is more confusing than it should be. Even if all your loans are from the federal government, they’re managed by one or more of 10 “student loan servicers.”
To figure out where your loans are housed, pay a visit to the National Student Loan Data System, and then to each loan’s servicer’s site. To keep track of them all, create a spreadsheet that lists each loan’s servicer, type, amount, interest rate, and payment due date. You can also try a third-party tool like My LendingTree to compile the information in one place.
If you hold an array of loans from a handful of different servicers, you might want to look into consolidating your loans so you only have one monthly payment. Alternatively, you can consider refinancing your loans with a private lender. Just be warned: It can be difficult to qualify, and this may make you ineligible for certain federal loan protections. Read more about consolidating and refinancing here.
2. Pay Interest During Your Grace Period
Most loan servicers offer a six-month “grace period” between when you finish school and when your first payment is due. You should be aware, however, that most loans – other than subsidized or Perkins loans – accrue interest during this grace period. In fact, unsubsidized and private loans have been accruing interest since the moment they were disbursed.
At this point, there’s nothing you can do about the interest you’ve already accrued. But you can attempt to reduce the amount of interest that will be “capitalized.” This occurs when accumulated interest is added to your principal balance, essentially causing you to owe interest on your interest.
On unsubsidized and private loans, student loan interest is generally capitalized at the end of the grace period. To reduce the amount that gets added to your principal, you should strive to make interest payments on those loans over the next six months.
If you have subsidized loans, it’s safe to wait until the grace period ends because you typically aren’t accruing interest during this timeframe.
“I wish I’d known how quickly the interest adds up,” says Jen Smith of Modern Frugality.
“By the time I started making payments, my income was too low to make payments that could keep up with what interest was adding on every month,” says Smith.
3. Choose a Repayment Plan
When you graduate with federal loans, you’re automatically enrolled in the “standard repayment plan,” which spreads your monthly payments out over the next 10 years.
To see what you’ll owe each month, use this estimated repayment calculator from Federal Student Aid (FSA).
If the amount seems overwhelming, the FSA calculator will also display other repayment options, which include:
- Extended repayment: If you have more than $30,000 in debt, you can extend your repayment period to 25 years. You can elect to have your payments remain the same, or to gradually increase, over time.
- Graduated repayment: Under this 10-year repayment plan, your payments will start low and increase with time. But, since you’re not tackling much principal in the first few years, you’ll pay a lot more in interest.
- Income-based repayment plans: Several plans cap your loan payments at a certain percentage of your income, and extend repayment over 20–25 years. If you want to pursue one of these plans, you’ll probably have to do your own research. As freelance writer Kat Tretina recalls, “I couldn’t afford my payments, but despite calling my loan servicers, (income-driven plans) were never mentioned as an option. I learned about them on my own years later.”
The important thing to note is that the longer your repayment period is, the more interest you’ll pay. So, when choosing your repayment plan, use a student loan calculator to see how much interest you’ll rack up over time. Although it might be tempting to have lower payments now, you might change your mind when confronted with the interest charges.
As an example, let’s say you have $30,000 of federal loans at a 5.05% interest rate.
- With the 10-year standard repayment plan, you’ll pay $319 per month, and a total of $8,272 in interest.
- With the 25-year extended repayment plan and non-graduating payments, you’ll pay $176 per month — and a total of $22,876 in interest.
Only you can determine whether paying more interest is worth it, and it’s up to you to decide how much you can afford each month. While we’d always recommend paying your debt off as quickly as you can, avoiding default is the most important factor. (If you have private loans, you’ll need to talk to your lender about repayment plans.)
4. Explore Student Loan Forgiveness
Student loans are extremely hard to discharge — even in bankruptcy. This is why some students have begun to rely on the idea of student loan forgiveness.
The most famous program is Public Service Loan Forgiveness (PSLF), which promises grads who work in public service (think: nonprofits, government, education) that their loans will be forgiven after 120 on-time payments.
Athena Lent, founder of Money Smart Latina, is pursuing PSLF.
“I’ve worked in the nonprofit sector my entire life — literally since age 17 — so I felt it was an appropriate option,” she says.
The only problem? PSLF has made headlines for, well, not forgiving many loans. So before embarking on this route, make sure you’ve read all the fine print, and have the right type of loan and payment plan.
“I’m hoping my loans will be forgiven,” Lent says, “but with today’s political climate, I am also working on a Plan B.”
5. Attack Your Loans
Once you’ve gotten your repayment plan lined up, sign up for automatic debits from your checking account to your loan servicers. Not only will that prevent you from missing payments, but it will usually snag you a .25% discount on your interest rate, too.
Now also might be a wise time to think about the possibility of paying off your loans early. Going back to that $30,000 loan at 5.05% interest, here’s how much you could save (based on this calculator):
- By paying $100 extra each month, you’d pay off your loan almost three years early, and would save $2,496 in interest.
- By paying $300 extra each month, you’d pay it off in less than five years and save $4,648 in interest.
To make it easier, you can sign up for an automatic savings program, and put the total toward your debt every few months. Or, you can try strategies like the debt snowball, which involves paying off your debts from smallest to largest, or the debt avalanche, which involves paying off your loans with the highest to lowest interest. You can also ask your employer if your company offers any student loan repayment assistance.
If the interest on your loans is fairly low, it might be wiser to invest your extra money than pay off your student loans early. That’s because you could earn more in the stock market than you’d save in interest. Here’s a calculator that will help you crunch the numbers.
6. Pay Your Loans Every Single Month
Whatever path you choose, make sure you pay your loans every single month. The worst thing for your finances and credit scores is to ignore your loans — as much as you might wish, they’re not going away.
One Twitter user told me they wished they’d known collections can start as soon as you graduate, and eventually lead to garnishment of wages or tax returns. Defaulting on your loans will also harm your credit, which will affect your ability to get an apartment, job, car loan, or mortgage.
The point here: If you’re having difficulty making payments, talk to your loan servicer. If you’re experiencing hardship, you could even consider applying for deferment or forbearance. Just note you may be on the hook for any interest that accrues during this period.
Take a Deep Breath
While student loans can be frustrating, infuriating, confusing, and overwhelming, sticking your head in the sand is not the solution. Do your research, create a plan, and slowly tackle your student loans — but first, take a deep breath.
“When I graduated I looked at my student loans and thought I’d have them forever,” says Smith.
“They gave me so much anxiety. I wish I could go back and reassure myself that student loans are not the end of the world and you will pay them off.”