If you just graduated from college, it’s a time to celebrate, take a vacation, and look forward to starting a lucrative career. At this point, your whole life is ahead of you, and the last thing you want to think about is anything having to do with school. But there’s one thing that won’t ever, ever go away, no matter how much you try to avoid it (not even by fleeing the country):
Your student loans.
That’s right. Remember that money you borrowed four years ago that allowed you to attend college in the first place? Now that you’ve got your degree in hand, you’ll need to pay it all back. Depending on the terms of your loans, that can take years, if not decades, of serious financial commitment; one 2013 research study found that the average student loan repayment period was 21.1 years long.
You aren’t required to start reimbursing your lenders right away, but your payments will be due before you know it. If you’re unprepared, you’ll be subject to penalty interest rates and run the risk of debt – kind of like cramming for a big exam and not studying properly for it.
Knowing how to deal with your student loans, whether they are federal student loans or private student loans, over the next year means assembling a timeline of goals and alternatives. Follow this timeline to kickstart your repayment process and be debt free in no time.
The first 90 days
Get reacquainted with your loans
Federal or private? Subsidized or unsubsidized? Stafford or Perkins? It can be easy to forget what types of loans you borrowed, how many you have, or the amount of money you owe. Knowing the specifics is important, because each one may carry a different interest rate (especially in the case of private funds, where variable rates run amok), terms and repayment conditions. If you’re unsure what loans you signed up for, consult with the National Student Loan Data System for Students – the database allows you to view all the loans, grants and other financial aid you may have, the status of your loans, and your current enrollment.
Also, aim to get in touch with your alma mater’s financial aid department to confirm, especially for private loans, where no such database exists.
Remember your grace period
You’re not obligated to make any federal student loan payments for six months after graduating school. This "grace period" is a temporary reprieve from your loans for the express reason to find your financial footing when it comes time to enter a regular loan repayment schedule.
When researching the types of loans you have, look into the grace periods for each. Stafford loans traditionally carry a 6-month grace period, but some, like Perkins loans, carry 9-month grace periods, while PLUS loans have none at all. There are other exceptions, too: Stafford loans obtained between July 2012 and July 2014, for example, still accrue interest, which will be added to your principal when it comes time to pay up.
Other types of loans have different grace periods, while private loans typically don’t have grace periods.
Build a budget
If you don’t have one already, it’s never too late to start. If you have a job lined up with a full-time, salaried income, even better. There are many schools of thought and varying approaches to establishing the right budget, but one thing’s for sure: though a budget is mandatory, how you develop one is preferential. (We like the You Need A Budget method at PolicyGenius.)
Begin by simply tracking your monthly expenses and income. How much are you spending? Is there more money going out than coming in? Anticipate that your student loan payments will take up a big chunk of your budget; in fact, experts suggest reserving 31 percent of your budget towards loan repayments. If your current budget is still too restrictive, find creative ways to generate more cash, like taking on a side hustle, selling belongings you no longer need, or cutting back on discretionary purchases, like cable TV or Starbucks.
Try paying down interest first
For the unsubsidized loan holders, your grace period won’t stop interest from capitalizing on your loan balance. Take the first few months after graduation and try paying off some of the interest that has accrued, if possible. Don’t worry if you can’t tackle it all. What’s important is getting a head start before your combined student loan principal and interest become due after the 6-month mark.
Up to the 180-day mark
At this point, your grace period will have expired, and it’s time to begin paying off your student loans. Now that you’ve got a line on your loans and configured a budget, explore some of these options:
Find the right debt payoff approach
This doesn’t mean getting too overzealous and devoting 100% of your take-home pay to your student loans. For the first few months, pay as aggressively as you can – and as much as you can comfortably afford – towards the loan(s) with the highest interest rates or largest balances. Also known as the debt avalanche method, by starting with larger debt and moving downward to smaller debt (like an avalanche), you’re attacking your debt head-on before interest has a chance to accrue and your debt becomes unmanageable. It’s contrary to the debt snowball method, where borrowers are encouraged to pay down smaller debt first and work their way up to larger debt. We’d encourage you to crunch some numbers by using a debt payoff calculator to see what you can afford.
Examine loan relief alternatives
If you’re having a hard time making your student loan repayments on your own at this point, the U.S. Department of Education can assist where federal loans are concerned. Consult with your lenders if you qualify for one of several public repayment plans, like Income-Based or Income-Contingent Repayment, or Pay as Your Earn, also known as the PAYE Plan. Most income-based options reserve a nominal percentage of your income towards you student loan debt. You might also look into pursuing a deferment or forbearance, putting a temporary halt to your student loan payments.
If you have Stafford loans with a standard, 10-year amortization schedule, consult with your lender about switching to an extended or graduated repayment plan; while stretching your payments to 25 years will leave you owing more interest in the long run, your overall monthly payments will be cheaper.
360 days and counting
Consider refinancing or consolidating
Refinancing your loans with a lower interest rate, or consolidating multiple loans into one single loan with a lower, fixed APR, can ease the burden that exorbitant student loans can place on you and your finances in the years to come. Be careful about consolidating federal loans, however; they’ll be transferred into a combined private loan, which means you’ll lose several government-sponsored benefits attached to the original loans, like the above-mentioned repayment plans, or the chance to qualify for loan forgiveness.
Don't forget to save
Past the 1-year mark and beyond, if you’ve managed to make a dent in your student loans, don’t neglect other areas of your finances. As your career grows, increases and evolves, so should your income and the amount of money you set aside to save, even if it’s small amounts here and there towards an emergency savings. Try investing in a short-to-medium-term interest-bearing account – even a 24-month CD will do – and when the funds become liquid for withdrawal, take your compounded earnings and front them towards your debt repayments.