What happens when my grace period ends?
Unfortunately for my fellow 2013 college graduates, the grace for student loans will soon be over. The best way to tackle your student loans is to understand what type of loans you have, what the interest rates are, and how to budget for your monthly payments. The following guide is from a helpful article I found on LifeHacker.com. It cover all three essential parts of paying off your student loans.
What type of student loans do I have?
It's important to understand the type of loans because each one has different rules and may be more flexible or more rigid when it comes to repayment terms. Here are the main types of loans:
Federal Direct Student Loans: These are loans you borrowed directly from the U.S. Department of Education. These tend to have the best terms (i.e. lowest interest rate and more flexibility). You may have both subsidized and unsubsidized direct loans, with the difference being that the government pays your interest on the subsidized loans while you're in school or on a grace period.
Private Student Loans: These are loans you borrow from a private lender, with no government involvement. In general, interest rates on private loans tend to be higher than direct loans. Most private student loans have variable interest rates, meaning the interest rate can be raised (or lowered) over time, but, there are also a growing number of private student loans being offered at fixed interest rates.
So which kind do you have? If you're not sure, you can pull one of your monthly statements out of the filing cabinet or use the National Student Loan Database to verify the amounts and types of each student loan.
Once you've done that, you're ready for the second question...
How do my interest rates compare?
This is an important question because the quickest way to pay off your total debt is to pay off the account with the highest interest first. Some subsidized government loans, including the subsidized Stafford Loan, can have interest rates as low as 3.4%, while some private loans have interest rates that are 12% or higher.
So once you've figured out the type of student loans you have, make sure you understand which ones have the highest interest rates and how you can reduce those if possible. One thing you should try immediately is to ask the lender for a 0.25% interest rate reduction if you set up direct deposit for your monthly payments. It may not seem like much, but with a large loan amount and many years of compounding, that 0.25% can add up fast.
(And you can use ReadyForZero to visually coordinate all your loan payments in one place and make a plan to pay them off as fast as possible.)
What if I can't make my monthly payments?
If you can't make your minimum payments, you're not alone. However, you can't afford to do nothing. You must be proactive to find a course of action that works best—because if you simply stop paying your loans, you will eventually go into default.
And going into default is serious because it means your entire loan balance would then be due immediately, and your debt would be handed over to collections. Default can even result in garnishment of your wages. (Remember, it's uncommon for student loans to be discharged through bankruptcy.)
However, fortunately, there are ways to avoid this outcome. For one thing, you can generally ask your lender for a period of forbearance, in which case you would not be required to make monthly payments for a certain period of time (but would continue to accrue interest). And you can apply for deferment if you are enrolled in a graduate program, are unemployed, or are on active duty in the U.S. military.
But perhaps the best option of all, particularly if you can make lower monthly payments, is to adjust the repayment terms for your loans. With federal loans, you can apply for the Income-Based Repayment program, which caps your monthly required payment at 15% of your disposable income. That way, you can still make your monthly payments, but you will have to pay for 25 years before the remaining balance is forgiven.
If you have private loans, ask your lender if they have a program similar to Income-Based Repayment. Many of them will work with you to adjust your repayment plan.
Is consolidation a good option for me?
Finally, you should be aware that consolidating your student loans might be a very good move on your part. When is consolidation a good choice? Well, if it can help you lock in a lower interest rate or make it easier for you to organize your loan payments (or both) then it's worth considering. The federal government makes consolidation loans through its Direct Loan program. While it's not right for everyone, it may be worth looking into.
Private lenders also offer consolidation loans. As with federal consolidation loans, you should make sure to research the options thoroughly to see if you can obtain a lower interest rate and if the terms of the new loan fit your situation better than the loans you have currently.
No matter what, it's always better to be proactive when dealing with your student loans—and if your grace period is about to end, now is the perfect time to take charge.
Hope these tips from LifeHacker.com helped you on planning to pay off those student loans.