Managing Student Loan Debt After Graduation
You've graduated. Congratulations! Right now, you are probably thinking about jobs, friends, family, and how to juggle all of this with everything else going on in the world. But there is one more thing you need to be thinking about—repaying your student loans.
Most graduates believe that it will take about six years to pay off their loans, according to a survey by Cengage, an education content provider. But according to the U.S. Department of Education (DOE), those with between $20,000 and $40,000 in federal student loans on average take 20 years to pay off their debt in full. Optimism about meeting salary expectations within a year, landing a job in six months in their field of study, and a mistaken belief that they are in a better position financially than their parents were at the same age leave students with a skewed understanding of the actual time it takes to repay student loan debt.
Although it may be tempting to ignore your debt in favor of more immediate concerns (especially in a down economy), skipping payments and defaulting on your loans hurts your credit rating, leaves you vulnerable to legal action, and hurts your ability to get future loans, cars, homes, and even a job. And the longer you defer, the more you’ll owe because interest will continue to build. Even subsidized loans, which don't accrue interest for a specific time, still need to be paid.
If you have student loan debt, here is some advice on how to manage your debt wisely.
Typically, a loan holder will contact you several times via mail prior to your first payment advising you of your repayment terms and the availability of lower payment options. Make sure your address is up-to-date or you’ve used your permanent address for any loans. Because, even if you never receive a notice, you are still responsible for payments.
“I’ve seen quite a few borrowers who never receive a notice due to their moving and never updating the loan holder of their current snail mail and e-mail and phone number,” says Betsy Mayotte, the president and founder of the Institute of Student Loan Advisors. “The promissory note even states the borrower is required to keep their loan holder up-to-date on their contact info.”
All borrowers are put on a 10-year standard repayment plan unless they apply for a different option, Mayotte adds. They are notified of those options by the servicer several times prior to the first payment being due as well as during what’s called exit counseling that is facilitated by the school. They are also advised of these options again if they should become past due. The same applies to federal loans.
Most debt holders will eventually pay off their loans. To reduce stress, make a plan, says Mayotte. All types of borrowers need help navigating how to pay back their loan, she notes. Some may have a repayment strategy and want to make sure they haven’t missed anything, and others have no idea how to begin making a plan to pay back their loans.
“They’re just completely overwhelmed. They are either overwhelmed by how much they owe or they’re just overwhelmed by the different options that are available to them. And they just want someone to tell them what to do,” Mayotte adds.
Being smart about paying back your loan
There’s no one-size-fits-all approach to repayment. Your payment depends on how much you borrowed, the interest rate on your loan, the type of loan or loans you have, and the repayment plan you chose. “You can change repayment options often and multiple times,” Mayotte adds. “And you can technically change the loan type too—on a limited basis—by consolidating.”
If you’ve taken out federal student loans, there is a six-month grace period before you must start making payments to give you time to find employment. But it’s important to note which loans have this option. Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, and Unsubsidized Federal Stafford Loans have grace periods. But PLUS Loans do not, and neither do most private loans. If you haven’t done so already, contact your loan servicer now to find out your payback timeline and monthly financial commitment.
Once you do start a new job, set a budget for yourself that includes all your bills, loans, and fees. Use a student loan budgeting calculator to figure out how much you can allocate to pay down your debt. “A lot of people actually graduate college and haven’t looked at what their loan payments will be,” says Sabrina Manville, who, with Nick Ducoff, left university administrator jobs to launch Edmit, a software and student loan advice provider, in 2017.
Edmit helps give prospective students a complete estimate of the cost to attend an institution, so they’re prepared when it comes time to pay back loans. This includes tuition, fees, room and board, and other expenses. It also will help you estimate what your loan repayment will be: the total monthly payments plus interest after graduation. “It’s important to start doing the math as you get closer to graduation so that you don't bite off more than you can chew.”
Stay on top of payments
Start by figuring out which loan services you owe money to and making sure they have your updated contact information. Otherwise, you risk missing a payment, either because the lender sends the invoice to the wrong address or because they don’t connect your payment with the correct account.
DOE’s National Student Loan Data System tracks federal loans and can provide information on repaying them. For private loans, seek out your lenders or check your credit report and get contact information from there.
“What’s that old saying? ‘How do you eat an elephant? One bite at a time.’ I think that's a very appropriate adage to use with student loans because it's sort of the elephant in the room,” Mayotte notes.
If you miss a payment, it could result in delinquency or default. If you’re even one day behind, you are automatically delinquent. Default can happen if you remain delinquent on your loans for a set amount of time. For federal student loans, that number is 270 days or 9 months. Defaulting on your student loan can have dire consequences, including garnished wages and a damaged credit rating. Many people have found it helpful to set up automatic debit from a checking or savings account so they don’t miss payments (and you even may qualify for a 0.25% interest rate reduction).
If you’re interested in refinancing, look into the pros and cons carefully—it might not work out in your favor. If you refinance federal loans, you lose certain benefits, such as being eligible for the Public Service Loan Forgiveness (PSLF) program.
Many experts recommend paying as much as you can to reduce loan balance and amount of interest you will pay over the life of the loan. “Federal student loans do not have prepayment penalties—so if you decide to pay them off more quickly than you originally signed up for, you will not pay extra,” she says. “Prepayment penalties are not actually allowed for private student loans either—by law you have to be allowed to pay them back more quickly without paying any additional fee.”
Loans taken by parents may have prepayment penatlies, though, so you should always compare terms before signing those.
Is student loan forgiveness an option for you?
Mayotte’s most common question is about public service loan forgiveness. Under PSLF, participants who work for the government or certain nonprofit sectors are eligible for loan forgiveness. But there are strict requirements. The big one is that after you have already made 120 one-time qualifying payments (10 years’ worth), the PSLF may forgive the remaining balance on your direct loans. But data from DOE showed that only 1% of applicants had been approved.
“The rules for PSLF are not wicked complicated, but they’re not intuitive either,” Mayotte points out. “You need to be working for a particular type of employer. You need to have a particular type of loan. If you don't have that type of loan, in many cases there’s a way to convert to the right type of loan. But you can't do it at the end, you have to do it before you make your first payment. You have to be on a particular type of plan. You have to make your payments on time. Anybody who's looking at PSLF should make sure they carefully read the requirements.”
In addition to DOE’s web page on PSLF, many groups, including Mayotte’s, provide detailed information on the requirements. There are other loan forgiveness options, such as Teacher Loan Forgiveness, Federal Perkins Loan Cancellation, and a few others. Check the federal government’s page on loan forgiveness.
But you should “do everything you can to get rid of that debt,” says Bill Phelan, the CEO and cofounder of College Factual, a website that helps students make decisions about where to go for college. “Just kicking it down the road, hoping it'll get forgiven is not really a plan.”
Be honest with yourself
If you think you’re going to get behind on payments or have questions about your loan, seek help as soon as possible, advises Mayotte.
“It’s a matter of taking a step back and making a plan and making the phone call,” she says. “The people that default are the people that didn't make the phone call, especially with federal student loans. There's almost always a solution to make the debt manageable. And especially today we have programs that are based on income, and there's a forgiveness component at the end. There's always a light at the end of the tunnel.”