You may have all heard by now we are facing a student loan crisis. The total outstanding student loan balance is over $1.0 trillion. What’s worse still is 11.5% of this debt is over 90 days delinquent or in default and this number has been on the rise since 20031. So although student loans are often categorized as “good debt” (as opposed to something like credit card debt), it is important to take great care when dealing with these types of loans. Here are a few tips to keep in mind when paying off student loans:
- Identify all of your loans. Most graduates have a number of student loans, sometimes with a few providers and usually different interest rates. The first step when it comes to student loans is getting organized. Are these public or private loans? Where are the loans being serviced? How much are your monthly payments? When are they due?
- Consolidate if you can (but not too soon). Carrying more than one student loan increases the number of bills you must pay each month and can increase your chance of missing a payment. Consolidation can simplify this and even save you money in the long run. Do not consolidate too soon though, as this can eliminate some of your benefits like a grace period of 6 months before payments begin after graduation. Once this period is over, consolidation is worth looking into.
- Refinance if you can. Refinancing can lower your overall interest cost and decrease your monthly payment. However, if you work in the public sector, you may be eligible for loan forgiveness after a certain amount of service. This will no longer be available if you refinance a public loan with a private servicer.
- Only use forbearance as a last resort. Placing your loans in forbearance, which can temporarily reduce or suspend payments, can cause interest costs to soar since it usually still continues to accrue during this time. This should only be used when absolutely necessary and its best to resume regular payments as quickly as possible. And remember student loan debt cannot be forgiven through bankruptcy so you’ll be stuck with the added costs.
- Take all factors into account when considering prepayment. Prepaying your loans by either increasing your monthly payment or paying a lump sum seems like a great way to drive down your overall interest costs. However, it may not always be the best option if you have a relatively low interest rate and those funds can be better used elsewhere. You may want to consider paying off credit card debt with a higher interest rate, contributing to your 401k to receive an employer match, or saving an emergency fund.
There are many nuances to student loans but borrowers can greatly benefit from staying organized, avoiding missed or late payments and exploring all their options!