When it comes to student loans, the amount of money owed can be overwhelming and paying it down is no small feat. When tackling any kind of debt, there are good and bad ways to begin your journey to financial freedom.
The first thing any new degree-holder should do when beginning to pay off their student loans is find out how much he or she actually owes. After several years of borrowing money, it might be tough to know for sure how much you actually borrowed. For starters, Get Rich Slowly suggested heading to the National Student Loan Data System from the Department of Education. When you enter this system, you will be able to track down any Title IV loans and grants you received over the course of your education . It's important to keep in mind this system doesn't necessarily know every single loan you may have received because any private loans won't be listed. Be sure to make sure to find out how much you owe on these as well.
Once you know how much you owe, you will be able to form a debt repayment plan. There are several different ways to pay back federal loans, according to Credible . The most common are:
- Income-based: pay between 10 and 15 percent of your income for 25 years
- Pay as you earn: pay 10 percent of your income for 20 years
- Income contingent: either pay 20 percent of your income for 25 years or a fixed amount for 12 years, depending on which is less money
In each of these plans, the remaining balance is forgiven after the assigned number of years. Though these three payment plans are the most common, there are other options to paying off your loans.
Paying the Right Amount for You
For example, Get Rich Slowly explained, if you have several loans you are paying back, consolidating them could give you some financial stability. Typically, consolidating federal loans will void any protections and benefits received through them. However, if you have several private loans, consolidation could give you fewer loan payments to worry about each month, though the interest rate could go up in the process.
Allan Katz, a certified financial planner and president of New York-based Comprehensive Wealth Management Group, said a good way to get rid of loans faster is to simply pay them faster, if you are financially able to do so, Bankrate reported . Katz explained that a 10-year loan of $25,000 could be gone seven years faster by paying $700 a month instead of $288. While this could mean some serious budgeting, it will save a lot of interest in the long run.
Credible explained, too, that just a payment of $50 more than the monthly amount due could cut down on interest payments and save money in the long run.
However, if you can't afford to pay the extra amount and are having trouble taking on the minimum payments, Get Rich Slowly emphasizes the importance of reaching out for help. Talk to the servicer to see if another plan can be worked out. If you don't do this soon enough, your credit can weaken, which can make it more difficult for you to find loans for a future home or car.
Start Saving Now
Katz said a good strategy to stay on top of budgeting for student loan repayment is to create a separate savings account that will only be dedicated to paying back the loans. If you have direct deposit set up with your employer, ask to direct a certain amount of money you can afford to set aside to the savings account. Starting as soon as you can will go a long ways. Even if you haven't graduated yet, you can start a college savings account with a part-time job you have now.
Student loan debt takes time and patience to pay off, but by tackling it head-on, staying on top of payments and paying extra when you can afford to, you will find yourself moving toward financial freedom soon.
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