It’s easy to have a stress-free attitude about student loan debt in college, especially if your pay period hasn’t begun. However, to some, student loans can be like speaking a different language, so it’s important to understand how they work before you fall into bad debt. Here are the top things to know before your student loans kick in.
1. There Are Different Repayment Options
Once students graduate, they are automatically enrolled in the standard repayment plan. However, there are other plans out there that may be more beneficial. Consider doing a little research on payment plans before your loans begin. Graduates are responsible for contacting their lender to find out when the first payment is due. You can then ask if you qualify for an extended or graduate payment plan.
If graduates expect to see a steady increase in their income over time, the Graduated Plan will likely be the right choice for them. With this plan, monthly payments start low so they’re affordable and then increase after two years, usually over the course of a 10-year plan. You can also choose an income-based plan, where monthly payments are based on how much you earn. These payments are usually lower than those of a standard payment plan.
2. Interest Can Kick in as Soon You Get the Loan
An interest loan is tacked onto your loan automatically; sometimes this can be fixed, and sometimes it is variable. If you have a variable-interest loan, then this means your interest is subject to change over time. If you have a fixed-interest rate, then it will always stay the same. If you are a student working in college, then you may want to consider paying interest in school. This will help you pay off your loans quicker (and more easily) once you graduate. Keep in mind, interest accrues the second you take out the loan. If you choose to pay your loan early, however, your monthly interest payment while in school could be as little as $100 each month.
3. Deferment and Forbearance Are Two Separate Things
Under certain circumstances, graduates can receive a deferment or forbearance that allows them to pause or reduce their federal student loan payments. Postponing or reducing payments may help them avoid default. Forbearance allows you to make no payments, or reduced payments, for up to a year, but interest will accrue on your subsidized and unsubsidized loans (including all PLUS loans) during this period. A deferment is a period in which repayment of the principal and interest of your loan is temporarily delayed. Different situations can make you eligible, such as unemployment. Most deferments are not automatic; you’ll need to submit a request to your loan servicer.
4. The Sooner You Pay Off Your Debt, the Better
It’s important to research strategies to pay off your student loans as well as repayment options. Try to complete your exit counseling at your school to learn about your legal rights and responsibilities as a borrower. Then learn how much you owe and to whom. For example, ask yourself: Do you have federal loans and private student loans? How much do you owe on each? Find out when you can start making payments. Most forms of federal student aid will require you to start making payments after six months; private lenders may set other deadlines.
Soon it will be time to start repaying your loans. Understand that smaller monthly payments mean you’ll pay more over time, so if possible, make additional principal payments. This will allow you to pay your loan off faster and pay less interest over time. Budget carefully and identify expenses you can cut so you can put the money toward student loan payments. Lastly, try to avoid taking on more debt until you pay down your student loans. (You can track how your student loan debt is affecting your credit by viewing your two free credit scores, updated monthly, on Credit.com.)
More on Student Loans:
- How Student Loans Can Impact Your Credit
- Can You Get Your Student Loans Forgiven?
- A Credit Guide for College Graduates
Image: Nick White