How much do you know about your student loans (besides how much each monthly payment is)? You did some research before signing your loan agreement, but was that the last time you investigated your student loan repayment options?
It is easy to assume that whoever you are working with is the right fit for you, that you are in the right program. But isn’t it better to know your options and what a better path might be?
When has ‘one size fits all’ been better than ‘tailored to fit’? Here’s why you should be investigating your monthly payment options and ways to personalize your student loan repayment plan.
When Should You Reexamine Your Student Loan Repayment Options?
Student loan debt is a multi-year repayment process for many. The plan you have for repayment right out of college might not make sense once you are a couple of years into your career. Your life is not static, neither is your financial situation.
Every job change, raise, or promotion is an opportunity to review your financial situation and decide how much more you could be allocated towards paying down your loan balance. Personal life events are also a great time to take a look at your standard repayment plan and make sure it is the best fit for your new situation. Did you get married or have a child this year? You may have to calculate your joint income for repayment programs. Repayment plans for your federal student loans that made sense before might not be a good fit now. In fact, you can request a change or reevaluation for some federal plans if your income or family size have changed.
Income-contingent repayment plans must be renewed each year and your monthly payment amount may change each time. If you’re not in one of those plans, be sure to review your personal repayment plan at least every couple of years to make sure it is still right for you. A great time to do this is around tax season when all your financial paperwork has to come out anyway. Even if you spend an hour to discover you are still on the right track, you will feel satisfied knowing you are navigating your repayment journey, not just floating along.
How to Adjust Your Student Loan Repayment Plan
If you want to update your plan with your current loan servicer you will need to contact them directly. Not sure who your servicer is if you have federal loans? You can check by logging into your account on My Federal Student Aid.
Federal student loan repayment plans
The Department of Education details multiple different federal repayment programs for students on the Federal Student Aid website. The most popular and flexible are the income-based repayment plans (IBR), which base your payments on your discretionary income and family size while allowing you to work towards possible loan forgiveness.
StudentLoans.gov has a comprehensive repayment estimator tool to help borrowers decide which repayment program is right for their federal loans. Some of the assumptions made by the calculator might not be perfect for your financial situation, but it is a good starting point.
If your loans are currently in deferment while you complete your degree or graduate studies, you should confirm if they are unsubsidized loans that accrue interest before you start your repayment period.
Paying off high interest loans first
If you have some loans that have a significantly higher interest rate than others, one common strategy is to pay these off first. This is also called the avalanche method for debt repayment, popularized by Dave Ramsey.
Taking out these high debt loans first will ensure that if you do have to make more interest payments on loans, it is a smaller bill.
Some borrowers prefer to pay off their smaller balances first in order to have fewer open accounts on their credit report. Others focus their overpayments on private and unsubsidized federal loans in order to preserve their eligibility for interest subsidies on subsidized federal loans. You can always tell your servicer the specific amount you want applied to each loan.
Refinance your student debt for a lower interest rate
Has your financial situation improved since you graduated? If so, you may qualify for a lower interest rate than the one you currently have through private student loan refinancing—which can include both private and federal loans. Refinancing will also include combining your loans into one payment, which will simplify tracking your debt. You also don’t have to refinance all of your student loans if some already have a low interest rate.
If you are utilizing the benefits of a federal repayment or forgiveness plan (such as Public Service Loan Forgiveness or PSLF), or if you anticipate difficulty repaying your loans in the future, refinancing may not be right for you. However, if you are not using federal benefits and would like to pay less interest by shortening your loan term, or lowering your loan payments, refinancing might be a strong solution to shorten your debt repayment term.
Keep in mind that you can also consolidate your federal student loans through the government. You would receive a fixed interest rate based on a weighted average of your rates today. Federal consolidation preserves your access to most federal benefits like income-driven repayment and deferment. However, consolidating can reset your progress toward federal loan forgiveness.
Make more than your minimum payment due each month
If you have the lowest rates for your student loans possible, another way to make a dent in your principal is to always pay more than your minimum due each month. That way you can knock out your debt sooner and won’t have extra months of interest payments.
If you can’t consistently make larger payments, making one-time payments when you come into extra cash is another good way to chip away. Or start paying more towards your balance monthly when you do get that raise and are able to make larger payments.
It’s easy to get comfortable with making minimum payments, but having your money work for you will leave you much more satisfied.