When Michelle Balducci-Connelly graduated in 2010 from the University of Kansas, she entered a tough job market with $21,000 in student loans along with her degree in architecture.
It took a few months to find a job, but once she did, Balducci-Connelly made paying back those loans a priority. Her husband also had debt, and the couple kept to a strict budget for their first few years of marriage. “We just lived really super simply,” Balducci-Connelly said. “It wasn’t a lot of fun. We didn’t go out to eat. I didn’t buy new clothes.”
But the dedication paid off. Within three years, their loans were gone. Now 28, Balducci-Connelly says many of her friends still struggling with loans as they try to start a family or think about buying homes. “It feels great that that’s not something I have to worry about,” she says.
Members of the Class of 2015 could learn a lot from Balducci-Connelly’s experience. Student loans are the fastest-growing category of consumer debt, and the class of 2015 is the most indebted in history, with an average loan balance of more than $35,000 for those who borrowed to pay for college.
Here are seven steps to take that will help you attack your student debt and make the process as smooth (and cost-effective) as possible:
1. Find out whether you have a grace period.
You probably won’t have to start making payments (although you may accrue interest) until November or December. “Federal loans have a six-month grace period to let you get settled and look for a job,” says Deborah Santiago, vice president of policy and chief operating officer at Excelencia in Educaiton, a nonprofit advocacy group.
Related: How to Stop the Epidemic of Student Debt Defaults
The grace period on private loans may be longer or shorter, and a few loans don’t have a grace period at all, so check in with your lender.
Be sure to keep your lender up to date if you move after graduation. If you don’t get bills because they’ve been sent to the wrong address, you’re still on the hook for those payments.
2. Research your repayment options.
Paying back your student loans on the standard repayment plan is the most cost-efficient way to get rid of the debt, but that may not be possible if you have trouble finding a good job or have an extremely low starting salary. “If you encounter financial difficulty, contact your lender,” says Mark Kantrowitz, editor of college resource site Edvisors. “Explain the situation and find out what your options are.”
Some federal student loans are eligible for repayment programs that can make your monthly payment more manageable. If your total student debt exceeds your annual income, you may be eligible for one of these programs. It’s important to note that federal repayment programs lower your monthly payment but end up costing you more over the length of your loan.
- Graduated repayment: Starts with a lower monthly payment that adjusts up every two years for 10 years.
- Extended repayment: Stretches the loan out over a 25-year period.
Contact your loan servicer to find out about eligibility and enrollment requirements.
3. See whether you qualify for loan forgiveness.
If you make at least 20 years (10 years for public sector employees) of on-time payments on income-dependent repayment plans, you could have the balance of your loans forgiven. These plan options could also lower your payments:
- Income-based repayment: Payments are capped at 15 percent of your discretionary income for up to 25 years.
- Pay-As-You-Earn: Caps monthly payments at 10 percent of your monthly discretionary income for up to 20 years.
- Income-contingent repayment plan: Payments adjusted each year based on income and family size for up to 25 years.
Related: Bankrupt at 21: Trapped Inside a Web of Student Loans
4. Consider consolidation carefully.
It can get tedious to manage multiple loans, so consolidation makes sense from an administrative standpoint, but only if it keeps your interest rates at or below their current levels. Note: Multiple federal loans can be consolidated into one, as can multiple private loans, but federal and private loans can’t be combined.
5. Work the payments into your budget.
Factor your student loan payments into your post-college budget. That may mean less money for vacations, or even moving in briefly with your parents, but you’ll want to get into the habit of putting a priority on your debt payments. “Graduates need to make sure they’re budgeting wisely from the start,” Santiago says. “Rarely is that first new job at the pay level you would like.”
The easiest way to do that is to set up automatic payments, so that your lender automatically debits the monthly amount owed from your bank account. You can’t forget to pay, so you’ll never incur late fees. Bonus: You’ll get a 0.25 percent rate discount for signing up for auto-payment on federal loans. Some private lenders may offer a discount for auto-pay as well.
6. Don’t rush to make extra payments right away.
If you’re lucky enough to have landed a job that pays you so much that you’ve got money to burn (ahem, engineering students), of if you got some unexpectedly generous graduation gifts, it may be tempting to wipe out those loans once and for all.
That’s not necessarily the best way to use that extra dough (although it’s certainly not the worst). Student loans are “good” debt in that they have relatively low interest rates and bring some tax advantages. Before paying them off entirely, make sure you’ve got an emergency fund with three to six months’ worth of expenses, and that you’ve started funding your retirement account at least enough to get your company match. If you’ve still got money left over, start making extra payments on the principal of your student loan.
7. Pay off private loans first.
Private student loans tend to carry higher rates and offer less flexibility than federal loans. If you do have extra cash, focus on getting rid of those private loans with the highest rates first before moving on to the lower-interest federal loans.
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