Paying off student loan debt as soon as possible is on the top of the to-do list for many new graduates, but how fast you can eliminate your debt depends on several factors, such as income, loan type, interest rate and personal financial goals.
Whether you’re graduating this December or want to get ahead of the curve for your Spring graduation, here are a few things to keep in mind before you get started on your payoff.
Determine your student loan provider and loan types
First thing’s first: gather all the details you can about your student loans. Figure out exactly how much you owe, what types of loans you have and who is servicing your loans. You can even stop by or call your school’s financial aid office for assistance.
Most students in the United States have federal loans, which are provided by the government. For undergraduate students, these loans may be subsidized — meaning interest is paid for you while in school, during your grace period and if you need deferment — or unsubsidized — meaning any interest the loan accrues is your responsibility as soon as it’s deposited into your account. Subsidized loans are need-based, while unsubsidized loans do not account for need. Each federal loan generally offers a fixed interest rate and does not require a co-signer.
Private loans, on the other hand, are provided by private institutions and tend to have higher interest rates. Unlike federal loans, private loans don’t offer mandatory borrower protections (such as deferment or forbearance options).
As long as you have a FAFSA account, you can view loan details and provider information on the National Student Loan System website. You can also contact student loan servicers by phone (contact information can be found on the Federal Student Aid website).
Decide on a payoff method
There are a few factors to consider when deciding on a student loan repayment plan, including whether or not you have a job lined up after graduation, the dollar amount of your loans, loan time, and more.
Use your grace period wisely
Your grace period begins once you graduate, leave school or drop below half-time enrollment and is designed to give you time to find a job and get on your feet before your repayment begins.
Depending on your loan type, you may be charged interest during your grace period.
“From a psychological standpoint, a lot [of students] graduate and they have this grace period, and due to the name of it, you think it’s a free period,” says Colin Moynahan, financial planner at Twenty Fifty Capital. But there’s no reason not to jumpstart your repayment and keep from accruing more interest if you have the means to do so.
“If you’ve got the income coming in, you graduate and go right into a job in 30 days, that’s the time to make serious headway on those payments,” he says.
You can learn more about which loans offer grace periods on the Federal Student Aid website.
Situation: You’ll have a stable income after graduation
If you graduate college with a job lined up and expect to have a stable income for the next few years, consider a plan that will allow you to pay off your debt quickly with minimal interest.
A standard repayment plan is a basic plan for loans that fall under the Direct Loan Program and Federal Family Education Loan Program. This option may end up saving you more money overall as it set a higher monthly payment from the get-go.
A graduated repayment plan, on the other hand, starts you out with small payments that slowly increase over time (up to ten years).
Situation: You’re not sure where the future will take you
Not everyone scores a job right after graduation. If you’re unsure where you’ll end up job-wise and don’t plan to have a steady income stream, it may be best — at least in the short-term — to choose one of the four income-driven repayment plans offered by the federal government.
These plans revise your monthly student loan payments based on your income and family size. In some cases, your monthly payments could be as low as $0.
Situation: You’re going into eligible government or nonprofit work
A Public Service Loan Forgiveness plan is available to those who are employed by the government, a nonprofit organization or another qualifying employer. After making 120 qualifying monthly payments and meeting other requirements, your remaining balance may be forgiven.
Make sure you read the fine print, become familiar with each of the requirements for qualification and never miss a payment towards your loans to improve your chances of qualifying for the program.
Other payoff options
Paying with a credit card
According to federal law, federal loan providers cannot accept credit card payments towards student loans (private lenders may be more lenient, but there’s no guarantee). Instead, third-party services like Plastiq help you pay with a credit card for a 2.5 percent fee.
Deferment or forbearance
If monthly payments simply aren’t possible at the moment, deferment or forbearance of your student loans allows you to either pause payments for a period of time or lower the amount of your payments.
“If there’s an extenuating circumstance where you know that cash flow is not going to be predictable or even consistent for a period of time, you could be putting yourself in a pretty tough situation if you don’t defer,” Moynahan says. “It’s case-by-case.”
You’ll still earn interest on your loans during forbearance, but with deferment, your loan type determines whether or not you’ll be charged interest.
Should you expect your situation to continue, you may want to look into an income-based repayment plan that can work for you long-term.
Planning to go to grad school?
By enrolling in graduate school with unpaid federal loans from a prior degree, you’ll receive a notification in the mail or via email stating your student loans are scheduled for deferment.
You have the option to pass on deferment and pay your student loans throughout grad school, but you must notify your servicer of this choice swiftly after receiving the notification. Otherwise, your loans will be deferred and any automatic payments you have set up will come to a halt.
Refinancing your student loans
If you’re dissatisfied with your interest rate and are willing to give up the borrower protections that federal loans allow, refinancing your student loans may help lower your interest rate, making it cheaper to pay it off in the long run.
Refinancing involves taking out a new loan with a private company. That company will pay your federal loan and offer you new terms to pay them back. This may be a good choice for those looking for a lower interest rate and standard monthly repayment process. Refinancing may be especially helpful if you’re able to pay more than what you owe monthly, freeing you from even more interest.
Beware, though — you can’t switch back to a federal loan once you’ve refinanced.
Considering the repayment plan flexibility and consumer protections you’ll give up when refinancing to a private loan, you should seriously consider your choice, Moynahan says. “Is it worth it in the long term to basically take [your options] off the table?”