Do you have student loans? Will you need to take out student loans? Learning about student loans can be very overwhelming. It is important to fully understand all aspects of your loans if you want to be able to pay them off quickly and efficiently.
Where Do I Start?
Accepting Your Loans
Do not accept all of your student loans if you do not need them! Sometimes you will be offered a much higher amount than you will actually need. You should not accept these extra loans because 1) they could start accruing interest right away depending on the type of loan and 2) you could accidentally spend them, thus putting yourself into more debt. You should only accept the amount that you will need to pay for school, housing, and other living expenses. The best way to determine what amount you need is to create a budget outlining how much money you will need each month based on your tuition, housing, meals, books, etc. I always leave a little extra each month just in case of emergencies.
Subsidized vs. Unsubsidized
When deciding which loans to accept always choose the subsidized loans first. Subsidized loans are the best option because the government pays for your interest while you are still in school. So you do not have to worry about interest accruing while you are getting your education. Unsubsidized loans start accruing interest as soon as you accept them, even while you are still a student. That accrued interest will then be capitalized, or added to your principal amount, meaning that you will then have to pay interest on an even higher amount (principal + interest accrued while in school).
Interest rates do matter!!! When choosing which loans to accept it is also VERY important to take notice of the interest rates. The lower the interest rates the better. The best student loan to accept is one that is subsidized with a low interest rate (<5%).
How Should I Pay Them?
Setting Up Your Plan
When paying off your loans you should always pay the loans with the highest interest rate first. You will of course have to pay at least the minimum payment on each loan, but if you have extra definitely use it towards your loan with the highest interest rate instead of splitting it up. I do not recommend doing a debt snowball (paying the smallest loan off first and so on) because it does not actually help you to save money. You might end up paying a lot more in interest if you pay the smallest loan amount first.
Set up automatic payments! If you are using MyFedLoan.org, which you probably are, then make sure to set up automatic payments for your minimum payments. This will help you in two ways: 1) you will never forget to make a payment and 2) signing up for automatic payments on MyFedLoan lowers your interest rates by .25%.
Income Based Repayment
Not everyone is in the position to pay off their student loans in 5-10 years and that is okay! If you are struggling to pay your minimum monthly payment then you can set up an income based repayment plan. This means that your monthly payments will be calculated based on how much money you are currently earning. This can be really helpful for a recent college graduate who has not yet found their “career job”. You can sign up for income based repayment right on your loan servicer’s webpage.
You can actually get a tax break for paying off your loan interest! Make sure that when tax season rolls around you download your 1098-E Tax Statement. If you have multiple loan servicers, then you may receive more than one form. This year I received two forms. If you do not use the online system for paying your loans, then your 1098-E may come in the mail. I have gotten a lot of money back the past two years by claiming my student loan interest. It is super easy and definitely worth it!
One possible way to lower your interest rate and get access to other programs is through loan consolidation. This means that all of your loans will be put together into one payment with an interest rate that is a weighted average of all your loans. You need to be careful when consolidating your loans because you want be sure that your interest rate will actually be lowered using the weighted average formula. Consolidating your loans can be tricky business so it is best to get information from the pros at Federal Student Aid.
What is a Loan Servicer?
A loan servicer is an entity that handles the billing/repayment for federal student loans. FedLoan Servicing is one of the largest companies, but there are many others. Your loan servicer will be automatically assigned to you and they will contact you to start your repayment.
What about a Federal Perkins Loan?
A Federal Perkins Loan is great because it has a fixed interest rate of 5% and is subsidized while you are in school. Your college or university is the lender for your Perkins Loans. This means you will either pay directly to your school or to your school’s contracted loan servicer. It is important to remember that if you have a Perkins Loan then you will have multiple loan servicers and thus will not pay everything that you owe to one entity.
Any Tips to Help Me Pay Them Off?
Get a Side Hustle
Whether you are still in college or have started your career, one surefire way to get a jump start on paying your student loans is to find a side hustle. You might be wondering ‘if I’m still in school, why should I start working on paying my loans now?’. The answer is simple. Unsubsidized loan interest accrues while you are in school and then capitalizes. If you can pay off the accrued interest before your unsubsidized loan capitalizes, then you can save a lot of money! If you find a side hustle and you don’t need that money for day to day living expenses, then you can put that extra money towards your unsubsidized student loans.
Side hustles that I recommend are babysitting, pet sitting, or tutoring because you can often do these jobs at nights or on the weekends when you don’t have work or school. Other great side hustles can be found online. Use your talents! If you are great at graphic design, then consider freelancing on Fiver. If you are super crafty, open an Etsy shop. If you are bilingual, become a Skype tutor.
Sacrifice—But Not Too Much
One way to pay off your student loans faster is to make sacrifices. However, you want your sacrifices to be reasonable and not make your life miserable. Some sacrifices that I recommend are: living at home for a year, getting another roommate, making homemade gifts (if you are artsy), settling on that used car, or wearing secondhand (but cute) clothes from friends and family. It is also important to find free activities that you and your friends/family enjoy. This way you are not compromising your quality of life by skipping events and staying home all of the time. Some cost free activities my friends and I enjoy are hiking, going to the pool, movie nights, and playing soccer.
Budget, Budget, Budget
One of the most important components of paying back your student loans quickly is an accurate budget. You need to know all of your monthly costs, how much you would like to put in savings, and the amount you want to put towards your loans. Make sure to review your budget monthly and write down every single expense. Any extra money you can put toward your loans or savings.
Shelly is a 26 year old school social worker and travel blogger. She attended the University of South Carolina and received her masters from Washington University in St. Louis. She has paid off over $30,000 of student loans on a social work salary while still affording to travel the world. Make sure to check out her blog for budget travel tips and trip ideas.