If you have earned a degree recently, or are currently working towards that goal, there’s a chance you have taken out a student loan. At the start of 2021, 44.7 million Americans had student loan debt. It can be understandably intimidating to be thrown into the real world after school with college debt already on your plate.
Here are some tips for staying on top of your student loans whether you are just starting out with your career or still searching for a job post-graduation.
Paying off Loans Earlier Saves Money
While most student loans use simple interest, there are some student loans that use compound interest. With compound interest, you accumulate interest on the balance due as well as the previous interest you have already accrued. If interest is compounded daily, debt can really start to add up. For example, let’s assume that your initial loan balance is $10,000 and your daily interest rate is 0.02%. If interest is compounded daily, the day after you take out your loan $2.00 would be added your principal ($10,000 x 0.0002) making your new total due $10,002. The day after that, another $2.00 ($10,002 x 0.0002) would be added, and so forth.
So, it’s important to first understand how interest is being calculated on your student loan. And even if your student loan uses simple interest, there are still some circumstances where you could end up paying compounded interest if you utilize grace periods to defer loan payments. This is referred to as student loan capitalization.
Because interest is charged on your principal (the amount you still owe on your student loan), your interest charges will decrease as you make regular loan payments. Many student loans have a minimum payment due each month for the life of the loan. However, if you pay more than the minimum, the amount of interest you accrue over time will be less and you'll pay off the loan sooner.
Before making extra payments on your loan though, you should ensure that the payment will be applied correctly. Typically, your loan servicer will apply the extra amount to accrued interest, but you can usually go to their website or contact them directly to have the extra funds applied to your principal, which will help to reduce your future interest charges and help you pay down your loan faster.
Refinancing Can Lower Your Interest
Like many other types of loans, student loans can typically be refinanced if you qualify for a lower interest rate. Doing so could potentially reduce your monthly payment or allow you to pay extra towards your outstanding principal to pay off your student loan faster. Requirements to qualify for student loan refinancing can vary, but oftentimes having a job and steady income could qualify you if you were not employed when you first received your loan. Additional factors that could potentially qualify you for refinancing might include an increase in your credit score, a better debt to income ratio, or improvements to your overall credit history.
The biggest risk to be aware of when refinancing is that if you move from federal to private student loans, you could lose certain protections you had under the federal loan. These could include the option for hardship deferrals as well as loan forgiveness programs. Additionally, if you need a co-signer to refinance a student loan, you and the co-signer should both keep in mind that they will become liable for the remaining balance of your loans if anything ever happens to you.
Automatic Payments Can Save Money
Utilizing “auto pay” through your lender can help you manage your loan payments and avoid possible late fees. You can either set things up to have your minimum payment deducted each month, and you can make extra payments manually as you’re able, or you could choose to have a higher amount automatically taken out each month to pay down your loan balance faster. Some student loan servicers even offer a slightly lower interest rate if you enroll in auto-pay. It’s a good idea to ask your loan servicer if this is an option.
Commit to a Plan
Ultimately, to be able to pay off your student loans you'll need to plan ahead. First, create a budget that guarantees you can make at least the minimum payment each month while still having room for other necessities and expenses. Each month, you should check your spending to see if there is any extra money you can put towards your loan balance, or if there are things you can cut from your budget to help free up more money. If you find yourself with any extra money due to a work bonus, tax refund, prize winnings, or other financial windfall, commit to putting at least some of it towards your student loan. It may take some discipline to stick to your student loan repayment plan, but it can really pay off in the long run.
Here are some tips for staying on top of your student loans whether you are just starting out with your career or still searching for a job post-graduation.
Paying off Loans Earlier Saves Money
While most student loans use simple interest, there are some student loans that use compound interest. With compound interest, you accumulate interest on the balance due as well as the previous interest you have already accrued. If interest is compounded daily, debt can really start to add up. For example, let’s assume that your initial loan balance is $10,000 and your daily interest rate is 0.02%. If interest is compounded daily, the day after you take out your loan $2.00 would be added your principal ($10,000 x 0.0002) making your new total due $10,002. The day after that, another $2.00 ($10,002 x 0.0002) would be added, and so forth.
So, it’s important to first understand how interest is being calculated on your student loan. And even if your student loan uses simple interest, there are still some circumstances where you could end up paying compounded interest if you utilize grace periods to defer loan payments. This is referred to as student loan capitalization.
Because interest is charged on your principal (the amount you still owe on your student loan), your interest charges will decrease as you make regular loan payments. Many student loans have a minimum payment due each month for the life of the loan. However, if you pay more than the minimum, the amount of interest you accrue over time will be less and you'll pay off the loan sooner.
Before making extra payments on your loan though, you should ensure that the payment will be applied correctly. Typically, your loan servicer will apply the extra amount to accrued interest, but you can usually go to their website or contact them directly to have the extra funds applied to your principal, which will help to reduce your future interest charges and help you pay down your loan faster.
Refinancing Can Lower Your Interest
Like many other types of loans, student loans can typically be refinanced if you qualify for a lower interest rate. Doing so could potentially reduce your monthly payment or allow you to pay extra towards your outstanding principal to pay off your student loan faster. Requirements to qualify for student loan refinancing can vary, but oftentimes having a job and steady income could qualify you if you were not employed when you first received your loan. Additional factors that could potentially qualify you for refinancing might include an increase in your credit score, a better debt to income ratio, or improvements to your overall credit history.
The biggest risk to be aware of when refinancing is that if you move from federal to private student loans, you could lose certain protections you had under the federal loan. These could include the option for hardship deferrals as well as loan forgiveness programs. Additionally, if you need a co-signer to refinance a student loan, you and the co-signer should both keep in mind that they will become liable for the remaining balance of your loans if anything ever happens to you.
Automatic Payments Can Save Money
Utilizing “auto pay” through your lender can help you manage your loan payments and avoid possible late fees. You can either set things up to have your minimum payment deducted each month, and you can make extra payments manually as you’re able, or you could choose to have a higher amount automatically taken out each month to pay down your loan balance faster. Some student loan servicers even offer a slightly lower interest rate if you enroll in auto-pay. It’s a good idea to ask your loan servicer if this is an option.
Commit to a Plan
Ultimately, to be able to pay off your student loans you'll need to plan ahead. First, create a budget that guarantees you can make at least the minimum payment each month while still having room for other necessities and expenses. Each month, you should check your spending to see if there is any extra money you can put towards your loan balance, or if there are things you can cut from your budget to help free up more money. If you find yourself with any extra money due to a work bonus, tax refund, prize winnings, or other financial windfall, commit to putting at least some of it towards your student loan. It may take some discipline to stick to your student loan repayment plan, but it can really pay off in the long run.