If you’re a recent graduate who received your diploma in May, you’re in for a real treat: It’s time to start making payments on federal student loans.
Instead of just paying haphazardly, it’s critical to come up with an attack plan in order to minimize your time and maximize your dollars on this repayment journey. But you can’t move forward with a plan until you understand all your options. And even if you’re a not-so-recent graduate who’s been making payments on your student loans for years, it’s still critical to re-evaluate your repayment plan from time to time, especially considering that student loan debts can be sold from one lender to another.
The repayment journey starts by facing the full scope of your debt.
Tracking down your loans
The first thing you need to do is evaluate your student-loan situation. A good starting place is the National Student Loan Data System (NSLDS), which aggregates your federal student loans. Private loans won’t be tracked here, but pulling a copy of your free credit reports can help you find them. You should also check in with your parents if they helped you with paperwork.
Also, if you have private student loans, you’ve probably already started the slog of debt repayment. Those lenders rarely offer the same six-month deferment as the federal government.
Making a plan
Once you’ve tracked down your loans, it’s time to create a plan.
Whitney Hansen, a financial coach and host of “The Money Nerds Podcast”, suggests that borrowers who want to aggressively pay off debt should focus on decreasing spending in the big three categories: housing, transportation, and food. Hansen, by the way, paid off $30,000 of student loans in less than a year.
But you don’t have to go into hyper-aggressive mode to put a dent in your dent. Paying just a little above the minimum due, and then telling your lender where you want that money applied, can help make a significant difference.
David Carlson, author of “Student Loan Solution: 5 Steps to Take Control of your Student Loans and Financial Life”, acknowledges just how complicated student loans can be thanks to multiple types of loans and lenders, and various repayment plans. While it’s not fun, Carlson advises borrowers set aside time to keep educating themselves about their specific loans as well as all the available options for repayment, from income-driven repayment loans to forgiveness programs to consolidation and refinancing.
That education process is key because it can help you avoid costly mistakes in the future.
Avoiding the common mistakes
Whether you’ve just graduated or are a few years into your student loan repayment journey, there are lots of potential trips and traps that stand between you and efficiently reaching that $0 due balance.
The most common mistake is failing to make any payments and ending up with your loans in default. Not only can this crush your credit history and score, but there’s a troubling fact of which many graduates are unaware.
“Student loans are incredibly difficult to discharge through bankruptcy,” says Carlson. “So not making payments and falling into default doesn’t do you any favors.”
Another mistake is failing to put your loans on a plan that is tailored to your financial situation because most lenders aren’t there to hold your hand or even enlighten you.
Repayment, forgiveness programs
The Federal government offers four income-driven repayment plans for borrowers. These plans prorate your monthly payment relative to your income. Then, after 20 or 25 years of payments, depending on your loans, a borrower is eligible to have the remaining debt forgiven.
Public Service Loan Forgiveness (PSFL), discharges remaining, qualifying debt after 10 years of qualifying payments and qualifying employment. But you would also need to know to consolidate your loans and be on an income-driven repayment plan in order to be eligible for forgiveness.
You need to evaluate your options and make a plan before you take either of these steps.
“Consolidation is something that can’t be undone, because once you create a consolidation loan, the loans you consolidated no longer exist,” explains Carlson. That could cause a huge program, especially for people who have already been working toward student loan forgiveness.
“Let’s say someone had made three years of qualifying payments towards loan forgiveness on their existing loans,” says Carlson. “If they consolidate their loans, they are starting at square one for forgiveness, because the qualifying payments were made on the previous loans, which no longer exist.”
Consolidation though can still keep federal loans federal. Refinancing is an entirely different beast.
What about refinancing?
Refinancing may sound really strange as a concept. You’re taking out a new loan (at a lower interest rate) and using that new loan to pay off the existing loan(s). This will essentially bundle all the original loans into one, simple loan with a lower interest rate, which can save you hundreds to thousands of dollars and even shave years off the repayment term.
But there’s a huge catch.
Once you refinance federal student loans, you’ve turned them into a private loan. And similar to consolidating, you can’t revert. This means giving up access to any perks of federal student loans like income-driven repayment or forgiveness or deferment, which during hardships enables borrowers to pause payments.
If you’re paying off a private student loan, which often comes with much higher interest rates compared with their federal counterparts, it doesn’t offer the same perks. But with private loans, refinancing to a lower interest rate can be advantageous.
Will my loans actually be forgiven?
The PSLF program has received a lot of negative attention for its notoriously high rejection rate. Many of these rejections were sent to candidates who spent 10 years making payments only to be told they screwed up along the way and their debt wouldn’t be forgiven.
Carlson advises you don’t let the media attention of high rejection rates deter you from seeking PSFL if you’re eligible.
He recommends you first understand all the requirements, including qualifying employment and loans and to make sure you have those loans on a qualifying repayment plan.
“The next step is getting your payments officially tagged as qualified,” says Carlson. “To do this, you have to submit the Employer Certification Form. While it’s not required to submit it regularly, I highly recommend borrowers submit it every six to twelve months. It costs nothing to submit and by submitting regularly you are getting your payments tagged as qualified.”
What if the next president cancels student loan debt?
With multiple presidential hopefuls adding canceling student loan debt to their campaign promises, some of today’s college grads are basing their financial plans on a reality that may never come.
“I would caution (against) putting hope in big policy proposals because of how difficult it is to actually get them passed,” says Carlson.
Hansen agrees and suggests you never relinquish agency over your financial life.
“Your financial life should never be put on hold while external factors, that you have very little control over, sort themselves out,” she says. “You’ll never regret the freedom you’ll feel from paying off your loans and putting control of your financial life in your own hands.”
Erin Lowry is the author of “Broke Millennial Takes On Investing” and “Broke Millennial: Stop Scraping By and Get Your Financial Life Together.”
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.