How To Begin Paying Back Your Student Loans
Are you wondering how you’ll begin paying back your student loans? Don't worry -- you're not alone.
If you feel that way, you can find comfort in knowing that millions of other college graduates are going through that same feeling. Why don't they teach a course about student loans in college, right?
Although you've been hit with the harsh reality of your student loans, it's important to remember one thing; you've made it through college! That is a huge accomplishment and something to celebrate.
Your post-college lifestyle will bring a lot of new changes; no more lab reports to get in before your 8 AM on Monday, no more paying your roommate to finish that U.S. History essay you forgot to do, and especially, no more putting off the repayment of your student loans.
More often than not, students do not start paying back their student loans while they're still in school; and because of that, it can be pretty easy to forget all about them.
I know that when I first graduated college, not only did I forget about my student loans, but I literally had no idea what kind of loans I had, how much in loans I had, or even where to go to find them.
So we figured the best thing for us to do here at MyBankTracker, is to put together a handy-dandy guide to help you figure out how to begin paying back your student loans.
We want to make one thing clear, however, this article is not about paying back your loans as quickly as possible, but rather, about how to even start conquering your loans in the first place.
With that being said, here are some tips to help you begin paying back your student loans.
Before repayment:
We consider the time “before repayment” to be any time you are not financially obligated to start paying back your loans as set by your provider.
So this time could be while you’re in college, or even while you’re in your grace period set by your lender.
A grace period is usually a 6-month payment-free window that lenders give to students after their graduation date.
The idea behind a grace period is to help students get on their feet and get their money in order before they are obligated to start making payments towards their loans.
This is probably the most important time for you to get all things student loans in order, and we’ve compiled a checklist to help you get started.
Step 1: Understand your loans
Before your first payments are due, it's a good idea to get a handle on your entire loan situation.
This means you should know the amount of every loan (if you have several), who the servicer is for each loan, your repayment term for your loan, your interest rates, and any other terms.
First things first, the terminology. How can you understand your loans if you have no clue what a principal balance is?
Here are some of the most common terms:
Principal balance
This can sometimes be referred to as your principal amount, initial amount, initial balance, etc.
Principal balance is the loan amount you originally applied for, with interest not included.
So for example, if your first year of college cost you $40,000, you (or your parents) applied for a loan for $40,000 - so your principal balance of your loan is $40,000.
This is super important to take note of since interest will be added to your principal balance, not only adding to the total amount you owe back, but also making it that much harder to pay down your loans.
Loan servicer
Sometimes referred to as your lender, is the company, bank or institution that is responsible for collecting and processing payments for your loans.
For example, if you took out a student loan through Discover® Bank, your lender would be Discover.
Your lender is the organization that sets all of the terms of your loan. The terms of your loan are your interest rate, repayment term, minimum payment due every month, and any other related fees and stipulations.
Some Student Loan Providers
| Lender | Borrowing Amounts | Available Terms | Eligible Loans For Refinancing |
|---|---|---|---|
| Citizen's Bank | $10,000 to $90,000 | 5-, 10-, 15-, and 20-year terms | Both Private loans and Federal loans |
| Discover Bank | $5,000 to $150,000 | 10- and 20-year terms | Both Private loans and Federal loans |
| CommonBond | $1,000 to $500,000 | 5-, 7-, 10-, 15-, and 20-year terms (Hybrid Rate loans are only available for 10-year terms) | Both Private loans and Federal loans |
| Wells Fargo | $5,000 to $120,000 | 5-, 10-, 15-, and 20-year terms | Only Private loans |
| SoFi | $5,000 to the amount your schooling costs | 5-, 7-, 10-, 15-, and 20-year terms | Both Private loans and Federal loans |
| PNC | $10,000 to $75,000 | 10-, and 15-year terms | Both Private loans and Federal loans |
| Earnest | $5,000 to $500,000 | 5-, 10-, 15-, and 20-year terms | Both Private loans and Federal loans |
Many lenders, like Discover, use third-party organizations to process the money you pay them through.
So although Discover, or any other institution, is your lender, when it comes time for repayment, they may use a third-party service to process your payments.
Some of the most common third-party services, are companies like Great Lakes or Mohela.
We’ll discuss that more later.
Interest
The most dreaded part of your student loans!
Interest, or your interest rate, is the percentage determined by your lender that is added on to your principal balance every month.
Your interest rate is calculated using a few personal factors; these factors include your credit score, income, assets (like savings accounts, retirement funds, etc.), pre-existing debt, and more.
If you have a great credit score, a steady income, and little to no debt, you’ll be given a low interest rate. However, if you have a so-so credit score, a lower income, and other finance-consuming debt, you’ll most likely be given a high interest rate.
Interest rate is probably the most crucial part of your student loans, since it can make or break how much you have to pay back towards your student loans, and how quickly you can do so. We’ve broken down the basics behind interest rate in this article about negative amortization and this one about variable/fixed interest rates.
Private Loans vs. Federal Loans
This is probably the terminology that not only confuses students the most, but most students are unaware of.
Federal loans are loans that are regulated, issued, and funded through the Department of Education, otherwise known as the government. When you apply for Financial Aid (FAFSA), you are applying for federal loans.
On the other hand, private loans are loans that are issued and funded through a financial institution, like a bank or a credit union. The bank that you take your private student loan out from, is the regulator of your student loan and is not is any way controlled by the government.
The biggest difference between the two is that federal loans offer payment-assistance programs, forgiveness programs, and other programs to help you pay back your student loans whereas private loans do not nearly offer anything close to the same payment assistance resources that federal loans offer.
If you've gone through FAFSA and taken out Federal student loans, you can find your servicer by creating an account and logging into the My Federal Student Aid website. Here, you’ll get access to every Federal Loan that is in your name.
Tip: Exhaust all federal loan options before considering taking out private student loans. Not only do federal loans offer the best payment-assistance options, but they usually also offer better repayment terms and interest rates.
If you’ve gone through a bank and taken out private loans, you should be able to get a free copy of your credit report to see a list of the creditors you owe (you can find your free credit report here).
If you’ve taken out loans directly with your college, check with the bursar’s or financial aid office to get information on those loans.
When you are doing this research check for:
- Total loan amounts
- Interest rates
- Where to send payments
- Accuracy of the information presented (balances, your contact details, etc.)
Step 2: See if you have a grace period
Most Federal and Private student loans have a grace period. This means you may have some time after graduation before you must begin paying the loan back.
Different loans have different grace periods, so check with your lenders to find out exactly when your first payment is due. While interest on most loans do not accrue while a borrower is in school, it could still accrue during the grace period.
Federal Student Loans
| Loan Name | Description |
|---|---|
| Direct Subsidized Loans | Loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school. |
| Direct Unsubsidized Loans | Loans made to eligible undergraduate, graduate, and professional students, but in this case, the student does not have to demonstrate financial need to be eligible for the loan. |
| Direct PLUS Loans | Loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. |
| Direct Consolidation Loans | Loan that allows you to combine all of your eligible federal student loans into a single loan with a single loan servicer. |
| Federal Perkins Loan Program | School-based loan program for undergraduates and graduate students with exceptional financial need -- under this program, the school is lender. |
One thing you should know is that you don’t have to take advantage of your grace period. One method of keeping your student loan payments lower is to enter into an Income Based Repayment (IBR) plan right away.
According to Jay Fleischman, bankruptcy attorney and creator of the Student Loan Show says, “The smart thing to do would be to waive that grace period and begin repayment under IBR at $0. If you start IBR right away, you don’t have to adjust your IBR amount until the next 12 months.”
He says that you must waive your grace period in writing, but it could be worth it, “For example, if you graduate college in May of 2018, you would start IBR in June 2018 at $0. You don’t re-certify until June 2019, but the 25-year clock running on loan forgiveness should you need it. You are also buying yourself an extra 6 months of no payments!”
Whether you opt to take your grace period or enter into IBR at $0, this is still a good time to get your financial ducks in a row. If you haven’t already, look for a job, begin saving and planning for making your payments when they start.
Step 3: Pick a payment plan that works for you
Quite possible the best thing about federal student loans, is that you have quite a few options when it comes to paying back your student loans.
As we alluded to above, there are federal payment plans dictated by your income.
These options all come under the umbrella of Income-Driven Repayment Plans. Each plan has a different approach of adjusting your payment based on a number of factors that not only include income but also other things like household size, loan type, etc.
Here are some quick notes about each one:
Revised Pay As You Earn Repayment Plan (REPAYE)
You can qualify for this plan no matter when you took out your loans. Payments will not exceed 10% of your discretionary income divided by 12.
Pay As You Earn Repayment Plan (PAYE)
Applicable for borrowers with Direct Loans who are new borrowers as of October 1, 2007 and have received a disbursement of a Direct Loan on or after Oct. 1, 2011. Payments will not exceed 10% of your discretionary income divided by 12.
Income-Based Repayment Plan (IBR)
Monthly payments will not exceed 15% (10% for new borrowers) of your discretionary income divided by 12. Borrowers with FFEL Program and Direct Loans are eligible.
Income-Contingent Repayment Plan (ICR Plan)
Your monthly payments are the lesser of (1) what you’d pay on a repayment plan with a fixed monthly payment over 12 years, adjusted based on your income or (2) 20% of your discretionary income divided by 12. This is only available for parent PLUS loan borrowers.
Note: these income-driven loan options are not automatic. If you don’t apply for any IDR plan, you’ll be given the default, 10-year, standard payment schedule. Make sure you apply for an IDR plan if you desire some flexibility with your loan payments.
Pros & Cons of IDR Programs
| Pros | Cons |
|---|---|
For private loans, there’s usually much less flexibility. When dealing with a private lender you will want to find out how much your monthly payment is, and chances are, they won't be as willing to budge on the amount.
However, that doesn't mean you shouldn't try!
Certain private lenders, like CommonBond and SoFi, were made specifically to provide loans to students and they understand that making your minimum payments can be a challenge.
Try giving your lender a call and see if they'd be willing to work with you and your budget.
If you have an extremely high interest rate, or are just simply finding that your monthly payments are too high to manage, think about refinancing your student loans. By doing so, you can decrease your interest rate, and change your monthly payments to better suit your finances.
Now that you have an idea of where to find your monthly payments and what they will be, it’s time to decide what stash of money those monthly payments will come from.
Step 4: Decide on the checking account you want to use
Hopefully, the amount of student loan payments you have to make do not exceed your income, or at the very least, allow you enough wiggle-room to cover other expenses.
If not, now is a good time to create a budget, or spending plan, to keep you on track with not only your student loan payments, but also other expenses. Cut back where you can to make room for student loan payments and other financial priorities where possible.
Assuming you’ve created your budget and are ready to start making payments on your student loan, your next decision will be to pick the checking account you want your money to be withdrawn from.
If you have a job, or another means of constant revenue that is directly deposited into your main checking account, this is the best account to use to make your monthly payments from.
You want to not only make sure you have a steady flow of money coming in, but also ensure that you will never miss a payment due to lack of funds.
If you're in need of a new checking account, check out some of our picks for the best checking accounts of 2018.
Next up, you have to decide whether or not to make automatic payments to your lenders each month.
If you decide to make automatic payments, your money will be withdrawn every month the same time, so make sure you have enough funds in the account you'll have funds withdrawn from.
You can also get discounts from your private lender, should you decide to pay your loan automatically.
Even if this perk is not stated anywhere on their website or in their literature it doesn't hurt to ask, as it's becoming a more common banking feature these days.
Automatic Payment Discounts from Top Student Loan Providers
| Lender | Borrowing Amounts | Automatic Payment Discount |
|---|---|---|
| Citizen's Bank | $10,000 to $90,000 | .25% |
| Discover Bank | $5,000 to $150,000 | .25% |
| CommonBond | $1,000 to $500,000 | .25% |
| Wells Fargo | $5,000 to $120,000 | .25% |
| SoFi | $5,000 to the amount your schooling costs | .25% |
| PNC | $10,000 to $75,000 | .50% |
| Earnest | $5,000 to $500,000 | .25% |
If you choose to pay manually, you have the option to switch accounts for loan repayment as needed.
If you have multiple loans you should also be able to allocate how your payments are distributed across each loan. If you decide to go this route, just be sure you're meeting the minimum payment on each loan.
During repayment:
This "during repayment" time is pretty straightforward. This is time you are physically making payments towards your student loans and making the best strides to paying them down effectively and efficiently.
The following is how we recommend you work on paying your student loans:
Step 5: Tackle your loans with the highest interest rate
Though borrowing money can help you reach your educational goals, you can't forget the cost of interest.
If you’ve got high student loan balances, this interest could add up quickly. Often, it's a good idea to attack the loan with the highest interest rate because you'll save the most money on interest over the life of the loan.
Another way to reduce the amount of interest you pay, is to pay more than the minimum payment. If you can afford paying more on higher interest loans, the reduction of the principal balance will also reduce the amount of the interest you'll pay over the life of the loan.
Another good student loan repayment strategy is opting to pay your private loans down faster than your federal loans.
Typically, these tend to have higher interest rates and less flexibility and protections as federal loans.
In addition to the payment-assistance programs offered by Federal student loans, another added perk they offer are student loan forgiveness programs. Federal loan forgiveness programs will allow your loans to be forgiven, given you work in a certain field for a certain amount of time.
If you fall behind in payments or are unable to make payments due to hardship, there are no forbearance, forgiveness or deferment options like you would have with federal student loans.
If you can pay off your private loans sooner, you’ll be at less risk for default.
Step 6: Check your monthly statement
You should always check your monthly loan statement for accuracy. You want to make sure that your payments are being applied to your account as you expect.
For example, if you want extra funds to go towards paying down your principal balance, that should be reflected in your statement.
Often times, that may not always be the case and some servicers will apply them towards interest instead, or next months payment.
Pay special attention to information such as:
- Minimum payment due
- Payments received
- How the payment is broken up and applied to your account in interest, principal and fees
- Loan balance (original and current)
Should you find inaccurate information on your statement, inform your lender, in writing, of the mistakes.
Attach any evidence that supports how the information should be corrected.
Check your statement again to make sure erroneous information is address.
Step 7: Do NOT miss a payment ever
Life happens and responsibilities can slip through the cracks. This is one of those things that you cannot afford to let slip. Missing payments on your student loan can adversely affect your credit score and cause you to incur late fees.
Furthermore, you can begin facing difficulties when it comes to negotiating more flexible payment options, if your loan goes into delinquency or default. If you've checked your budget and think you might not be able to afford a payment, it's best to call your lender ahead of time and let them know.
Otherwise, they may be less willing to work with you to make suitable payment arrangements if you fail to communicate with them.
Step 8: Help yourself manage your payments
If, for any reason, you encounter problems while trying to repay your student loans just know that you’ve got options. It doesn't have to be the end of the world if you cannot make your payment.
Some options include changing your payment due date or asking your lender for a few more days to make your payment.
If you don't foresee being able to make payments for sometime you could make moves to reduce your interest rate through refinancing your loans or consolidating them to make them easier to keep track of.
If you have a steady income and a good credit score, you may be able to refinance your private student loans with another lender. Some lenders are able to offer you better interest rates based on your personal credit profile.
With federal loan consolidation your interest rates may or may not be better, but you can combine loans to make it easier to repay them.
Federal loans also have the option for deferment and forbearance, which can cause your loan payments during financial hardships. Some federal loans are even eligible for complete forgiveness.
Final Thoughts
Starting to pay back your student loans is the first step in your very long journey of repayment. If you take note of all of the factors we mentioned in this article, you'll be in good standing to not only make your monthly payments on your student loans, but also to pay them back in a timely manner.
If you find that you're struggling to maintain your monthly payments, consider refinancing your student loans to get a better interest rate.
Paying back your student loans may not be a walk in the park, but the good news is that there are strategies like budgeting and seeking out flexible repayment options that can make the process much easier.
