A student loan is one of the most common ways to finance one’s education. While it may seem very attractive initially, the costs associated with the loan and interest rates compound quickly, leaving one in mountains of debt. This, in turn, has a major impact on one’s life, hampering the ability to afford homes or pay off essential bills. Developing and relying on an effective debt management strategy is key to becoming debt-free.
1. Calculate total debt
Before introducing any debt management strategy, one needs to know exactly how much they owe. This is because the accumulated debt can be of many types, such as federally and privately sponsored loans and credit card debt. Figuring out the exact amount will help one plan their finances better for the future.
2. Know the terms and conditions
Next, it is important to note that each loan plan has a unique set of terms, conditions, repayment rules, and interest rates. One must also note these details and list them on a spreadsheet. Having this information on hand can be instrumental in avoiding fees and penalties.
3. Review grace periods periodically
Student loans have a grace period, which is the period after graduation during which one can begin repaying their debt. These differ significantly based on one’s loan provider, so they need to consider this when planning finances.
4. Check federal and state loan forgiveness programs
The federal and 45 state governments offer some form of loan forgiveness to students in need and those working in public service fields. This may also apply to students who declared bankruptcy or whose school closed before graduation. So, it is important to carefully review these programs and verify the eligibility details to qualify for the waiver of student loan debt.
Public Service Loan Forgiveness Program (PSLF)
Those working in a public service job for the government or a non-profit organization may be eligible for loan forgiveness under this program. That said, one needs to make ten years of qualifying payments to be eligible for forgiveness.
Teacher Loan Forgiveness
Teachers working in low-income schools for five consecutive years may also qualify to have up to $17,500 forgiven on their federal loan payments.
Military Programs
Veterans and active-duty members of the military may also be eligible for loan forgiveness on federal loans.
5. Opt for debt consolidation
Those with multiple loans and staggered payment dates may also benefit from consolidating their loans into one. One of the biggest advantages of consolidation is that it reduces the monthly payments significantly. That said, it also increases the loan term, leading to more interest payments, so one must compare loan consolidation terms before signing up for any plan.
It is important to note that when opting for consolidation, one may also lose any benefits received from direct PLUS (Parent Loan for Undergraduate Students) loans.
6. Defer payments
Those who are not employed can have their loan payments deferred until later. If one qualifies for deferment under the federal loan program, the government may waive interest for the interim period.
Those not qualifying for deferment can apply for forbearance to stop paying the loan. Although this might seem appealing, it’s important to remember that the total loan repayment amount includes adding the principal and interest.
7. Consider alternative loan repayment plans
Those on a federal student loan may be eligible for alternative repayment options as well.
Graduated repayment
This refinancing strategy is ideal for freshers in the workforce. It increases the monthly payments at scheduled intervals over the life of a 10-year loan so that one can make lower payments at the start of their career. This has been designed with entry-level salaries in mind, with the firm belief that one will move on to better-paying roles in the coming years.
Extended repayment
One may want to extend their loan repayment period to lower the monthly payments. For example, spreading a 10-year loan over 25 years can help them better manage their finances.
Income-contingent repayment (ICR)
An income-contingent repayment plan may be useful if one has higher payments to make on federal student loans. Here, the monthly payment is based on one’s income; no more than 20% of the income goes towards loan repayment for 25 years. After this 25-year term, any remaining balance is forgiven.
PAYE
This plan is suitable if one is facing financial hardships. Here, the loan repayment limit is capped at 10% of one’s income for up to 20 years if one can prove financial difficulties.
While these plans may allow one to qualify for a lower monthly payment, they also increase the loan term significantly. So, one must check with the concerned loan service provider for details regarding eligibility and other fine print.
8. Set up auto payment
Many lenders offer discounts when one agrees to have the payments directly withdrawn from their checking accounts each month. For instance, under the Federal Direct Loan Program, one is eligible to receive a 0.25% discount on auto payments.
