If you're a recent college graduate, congratulations! Having that accomplishment under your belt is a significant step in life. However, the shine of finishing your degree program may feel a little less lustrous if student loans helped cover college expenses and repayment is looming. With most federal and private student loans, you generally have a break between graduation and when payments are due. Six months post-graduation, this grace period for student loan repayments ends, and monthly payments begin. That can be a scary situation to find yourself in if you aren’t ready for it. Before those student loan payments kick in, there are a handful of things to do to prepare for repayment, starting with accessing your loan details.
Accessing Your Student Loans
The majority of college grads who used student loans to pay for tuition, room and board, books, or other expenses, have more than one loan. Multiple loans are commonplace because all federal and some private loans are distributed to the borrower each semester. This means one student with a single degree can have six or more loans in their name by the time they graduate. Fortunately, graduates with federal student loans visit the National Student Loan Data System (NSLDS) to get all the information they need before repayment.
The NLDS allows students to find all their federal student loans in a single place. Information on the date of disbursement, amount of the loan, interest rate, and loan type is readily available. Those new to the site will need to create a Federal Student Aid ID and password.
Borrowers who have private student loans won’t see these details listed on the federal student loan site. However, most private lenders send out loan and repayment information before the end of the grace period. Be on the lookout for correspondence from your private student loan lender and follow instructions for getting online access, setting up payments, and tracking repayment progress over time.
Understanding Repayment Options
After identifying each of your student loans, the next important step is determining repayment plan options. Federal student loans default to the standard repayment plan, calculated as monthly repayment of principal and interest at a fixed amount over ten years. Graduates with thousands of dollars of student loan debt may find the standard repayment option overwhelming and out of reach relative to their budget.
Fortunately, other repayment options exist, including extended and graduated repayment, pay-as-you-earn, and income-based or income-contingent plans. Each repayment plan offers various benefits, such as a longer repayment term—up to 30 years for some borrowers. Additionally, payments may be based on your monthly income, providing some respite for graduates with a lower salary. However, longer repayment terms or lower monthly payments typically result in paying far more in interest over the life of the loan. If you’re unsure which repayment plan makes the most financial sense, contact your student loan servicer or use the calculator to estimate payments based on plan choice. You can find both servicer information and calculations on the Federal Student Aid website.
Carefully review your repayment plan options and select the one that fits within your budget and makes sense for your long-term financial wellbeing. Borrowers with private student loans likely do not have an option for alternative repayment plans. However, if the monthly payment seems burdensome, contact your lender to discuss options or consider refinancing.
Consolidation, Refinancing, and Forgiveness Programs
For student loan borrowers with multiple loans, consolidation or refinancing may be a smart option. Consolidation is the process of transitioning several or all federal student loans into a single, new loan. This eases managing repayment and may provide additional repayment plan options such as income-based or pay-as-you-earn programs. Consolidation does not cost the borrower anything, and you can complete the process online in a matter of minutes.
On the other hand, refinancing is used for either federal or private student loans. When you refinance, you take out a new loan to pay off several or all student loans to help manage repayment, reduce your interest rate, or both. From a long-term financial perspective, paying a single loan with a lower interest rate can be incredibly helpful for graduates. However, refinancing with a private lender can be challenging. Borrowers must qualify based on their credit score and income, or they may need a cosigner to secure approval. Once approved, the protections afforded to student loan borrowers—including various repayment plans, forbearance, and deferment of payments—no longer exist.
Additionally, take time to understand student loan forgiveness programs. For federal student loans, graduates may have an opportunity for forgiveness of loan balances once they make a certain number of consecutive, on-time payments. Forgiveness programs are available to eligible borrowers in an income-based repayment plan or those working in certain professions and public or nonprofit careers.
Other Important Considerations
In addition to understanding loan information, repayment plans, and restructuring loans through consolidation or refinancing, budgeting is a crucial component of success. Total your income for the month and then subtract all expenses to determine what remains for your student loan payments. If this budget seems tight, consider opting for a repayment plan with a lower monthly payment if possible. If that isn’t an option, work on reducing expenses so you have more of a surplus month to month. Doing this exercise creates a solid financial foundation for student loan repayment and championing your finances throughout a lifetime.
Managing student loans may seem like a daunting task, but following smart steps before making your first payment helps tremendously. Be sure to recognize the difference between federal and private student loans, their repayment plan options, and your ability to consolidate, refinance, or qualify for forgiveness at a future date. Most importantly, know what you can afford to pay each month to avoid defaulting on your loan payments. These small but essential steps make a world of difference in efficiently managing your loans over time. Your future self will thank you for the extra bit of homework you put in today!