Graduating college can be an exciting time, but along with graduation comes the notice in the mail that payments will soon need to be made on student loan debt. With so many things going on, some people decide to ignore these notices, and instead wait until they receive their first bill, or worse, a call from a collection agency, before coming up with a plan to pay these loans off. Paying off your student loans doesn’t have to be so bad, however, and with a little bit of planning you can create a budget that allows you to pay off your loans quickly.
To start, gather together any papers you have regarding your student loans. In your last semester of college, you should have had a counseling session in which the loan terms and payment amounts were explained to you. Find the papers from this session. If they’re lost, contact your school’s financial aid office and ask for a replacement copy. These papers will have the information regarding your interest rate, first payment date, and perhaps most importantly, the amount of each payment.
Each company you have taken out a student loan with, along with the federal government, will issue you a separate set of papers. In order to pay back your loans, you are required to make the minimum monthly payments over the specified period of time. Your original loan paperwork will include a lifetime cost of the loan (it’s required by the Fair Credit Reporting Act), but you can calculate this number by multiplying the amount of each payment by the total number of payments you are required to make. Subtract the total amount that you originally borrowed from this sum, and you can determine how much you will pay in interest over the life of the loan.
Many people are shocked at the amount of interest they will pay on their student loan. Because of this, many people decide to pay off their loans faster than required. Doing this will require some planning and short-term sacrifices, but the reward is paying less in interest, giving you more money over the long term.
A number of calculators found on line will compute the amount of money saved and how quickly you can pay off your student loans by adding an extra amount of money to your payment each month. A sum as low as $25 can save you hundreds of dollars in interest payments over the life of your student loan.
Paying back your loans will require you to make a budget, something that you would need to do anyway as soon as you are living on your own. Budgets do not need to be complicated, but they do need to include all of your bills and other expenses. There are a number of websites and books dedicated solely to creating budgets; try to put together a simple one for one month, then create one for one year.
To start, figure out your monthly income after taxes and any other deductions such as health insurance or retirement. This number is usually referred to as your “take-home” or net pay. Next, make a list of all expenses that you are required to pay, such as electricity, rent, your student loan payments, water, insurance, your car payment and gas, minimum credit card payments, and food. Make a second list of items that are not necessities, such as cell phone, cable, internet, additional loan payments, and all entertainment expenses. On a second sheet of paper, subtract your first list of necessary expenses from your net income. Ideally, you should have some money left over.
If you cannot afford your necessary expenses on your net income, you have two choices. Either get a second job in order to increase your income, or reduce your necessary expenses. This may mean trading in your vehicle for an older model, change to cheap car insurance, getting a roommate, and/or reducing your utility usage. Do not try to skip your student loan payments in order to pay for other expenses. Unlike other debts such as a mortgage, credit cards, or a car payment, student loans cannot be discharged in a bankruptcy. This means that your income tax refunds, your wages, and your Social Security checks will be garnished until the debt is paid. Since there is no cap on how much a collection agency can add to the debt, this amount can get out of control very quickly if you make late payments on your student loans.
If your student loan is more than 10% of your gross pay (the amount before deductions), you can try to get your payments reduced. Realize that this is only for federal loans, however, and under most of these payment plans you will be required to pay 10% of your total income towards student loan debt repayment for the next ten years or until the debt is paid off. Other deferments are also possible if you cannot find a job, but these programs will not stop interest from accruing on the loans, but rather just give you a few extra months before it is time to start repaying the loans. A final possibility is to refinance your student loans, essentially obtaining a second loan to pay off all of your debt, but with a lower interest rate and/or longer payment terms. Refinancing can lower your monthly payment and/or the total amount you spend on interest, but realize that you are only allowed to do this once with your student loans.
Once you know you can afford your necessary expenses, add items from your “wants” list to your budget one at a time. This will allow you to determine how much extra money you can devote to making additional payments towards paying off your debt faster.
