If you graduated from college this year, congratulations!
Also, your first student loan payment is due. (Cue sad trombone.)
If you borrowed federal student loans to cover your college expenses, you get a six-month grace period from Uncle Sam before he starts pestering you for payment.
If it’s any comfort (I know, it isn’t), you’re not the only one who owes. Outstanding student loan debt clocked in at $1.48 trillion in the second quarter of 2019, according to the New York Federal Reserve.
It’s easy enough to feel overwhelmed — you just graduated, started that first job (hopefully), moved out of your parents’ place and into your own (maybe).
But besides the obvious benefit — getting out of debt — making on-time student loan payments will reflect well on your credit score, which will follow you long after your dorm life memories have faded.
Ready to tackle that student loan debt? Good, let’s get started.
A Guide to Student Loan Repayment
When you’re ready to start repaying your student loans, it’s best to create a plan to avoid wasting time, money and energy. Here’s what you need to do before you make that first payment.
1. Know How Much You Owe and Who You Owe
If you’re like most grads, you took out multiple student loans over your multi-year college career — the average borrower has 3.7 student loans, according to a 2017 Experian report.
So it’s best to start organizing by figuring out who you owe, how much you owe and when it’s due. Oh, and interest rate is important, too. Need some help figuring it all out? Then check out this article that explains how to find out how much you owe in student loans.
2. Pay Off Your Interest Before the End of Your Grace Period
If you have the cash, pay off at least the accrued interest on your federal student loans before your grace period runs out. It can save you a bundle of money by helping you avoid interest capitalization — when the interest gets lumped in with your principal amount and you start getting charged interest on the total amount.
Wondering where to find extra money before the deadline? Consider taking up a side hustle to make some extra cash to throw toward the payment.
3. Come Up With a Plan… a Repayment Plan
Didn’t land that six-figure job — or maybe any job? Rather than sticking your head in the sand and avoiding your student loan payments, you need to ask for help. That means getting yourself on an income-driven repayment plan.
These plans cap your monthly payment typically somewhere between 10% and 20% of your discretionary income. Contact the loan servicer for your loan to find out which plans you can qualify for.
4. Think About Forgiveness
It’s possible that you can get your student loans forgiven. But it’s not easy or fast… or likely (cue the second sad trombone).
But if you work in specific fields — like teaching or nursing — you could be eligible for loan forgiveness after a set number of years. There are typically a lot of hoops to jump through — including making sure your loan repayment program and your employer qualify — so be sure you know the requirements of your forgiveness program.
5. Avoid Delinquency and Default
Remember that part where I told you not to stick your head in the sand? This is why: If you miss your payment by even one day, your federal loan becomes delinquent. If you’ve missed payments on your Federal Family Education Loan (FFEL) or direct student loan for 270 days, your loan is considered to be in default.
If you can’t afford your monthly payment due to unemployment or an approved economic hardship, you might qualify for deferment or forbearance. You can also qualify for deferment if you’re enrolled in an approved graduate fellowship program.
During deferment, you won’t owe monthly payments on your federal loans and your subsidized loans won’t accrue interest (but all the rest will).
A high or good credit score allows you to qualify for better loans and credit cards with lower interest rates and more favorable terms. A poor credit score may not even qualify you for a loan.
If you don’t qualify for deferment, the other option is forbearance, during which your lender allows you to stop making payments or reduces your monthly payments for up to one year. However, during forbearance, interest will continue accruing on all of your loans.
Both options are only temporary fixes, and you’ll probably end up owing more money in the end. But at least you won’t wreck your credit score.
6. Consider Life After College (and Student Loans)
It can be tough to see beyond that soul-crushing debt, but remembering that there is more to life than student loans is important for your financial future.
First, while throwing every available dollar at your student loan might help you feel like you’re making progress in that arena, don’t sacrifice your present financial state by pillaging your emergency fund (you have one, right?). It’s there to cover those unexpected expenses — like a new set of tires or unexpected vet bill — without sending you into credit card debt.
Additionally, you shouldn’t sacrifice your future for today’s debts. Instead of paying every dollar toward student loans, start saving for your retirement now. With plenty of years to go, you’ll be able to build an impressive nest egg future you will thank you for.
Bonus: Socking away your money in a 401(k) or IRA reduces your taxable income. So if you do decide to apply for an income-driven repayment plan, the federal government won’t count the money you’re saving for retirement.
Cue the big brass band. You deserve it.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.