10 Tips for Graduates Dealing with Student Loan Debt
College graduation is a rite of passage filled with pomp, circumstance and, sigh, coming to terms with student loan debt. More than two-thirds of college students graduate with student loan debt, the equivalent of an extra auto loan payment for a decade. So, after the graduation parties are over, it’s time to start planning for student loan repayment.
Most student loans enter repayment 6 months after the student graduates or drops below half-time enrollment. Six months is a long time to wait for repayment, long enough for you to lose track of your student loans.
These tips should help new college graduates plan for repaying their student loans.
- Create a student loan checklist with information about each of your student loans, including loan ID number, lender name, lender web site and phone number, payment address, amount borrowed, interest rate and monthly loan payment. It should also include the date your first payment is due.
- Add a reminder to your calendar about a week or two before each due date. If you don’t receive a statement or coupon book by then, call the lender to get the mailing address for the payment and the payment amount. The payment is due even if you don’t get a bill.
- Tell your lender about changes in your contact information. The loan promissory note you signed requires you to notify your lender whenever you move. If you don’t, it may take a few months for the loan statements to catch up with you. By then, you’ll be late with your first loan payment, maybe even in default. Don’t be delinquent!
- If you’ve lost your lender, you can get a list of your federal student loans at StudentLoans.gov. You can find your private student loans by getting your free annual credit report at annualcreditreport.com. Your colleges’ financial aid office may also be able to help you find a list of your loans and lenders.
- Choose the repayment plan with the highest monthly payment you can afford to save the most money.
- Avoid advance-fee loan scams. Don’t pay money to switch repayment plans or consolidate your federal student loans. You can do this yourself, for free, at StudentLoans.gov. It takes just a few minutes. Never share your FSA ID with anybody, as it is an electronic signature, not just a way to access your student loan account.
- Be careful about refinancing or consolidating your student loans. Loan consolidation does not necessarily save money. The interest rate on a consolidation loan may not be lower than the interest rates on all your loans. Also, if you consolidate your student loans, you will no longer be able to target the loan with the highest interest rate for quicker repayment. Be wary of refinancing federal student loans into private student loans, as you will lose the superior benefits that are provided by federal student loans.
- Target the loan with the highest interest rate for quicker repayment. This will save you the most money and lead to quicker repayment of all your student loans. There are no prepayment penalties on student loans, so you will not have to pay a fee to make an extra payment. Tell the lender to apply the extra payment to the loan with the highest interest rate, specifying the loan id number, if possible. Also, tell the lender to treat the extra payment as an extra payment and not just an early payment of the next installment.
- Sign up for auto-debit, where your monthly loan payment is automatically transferred from your bank account to the lender. Not only will you be less likely to be late with a payment, but many lenders offer a slight interest rate reduction (0.25 percent on federal loans and 0.25 percent or 0.50 percent on private student loans) as an incentive.
- Claim the student loan interest deduction on your federal income tax returns. You can deduct up to $2,500 in interest on federal and private student loans as an above-the-line exclusion from income. This means you can claim the deduction even if you don't itemize. The income phase-outs begin at $65,000 for single filers and $130,000 for married filers with joint returns.
There are also several good tips you should follow that are unrelated to student loans, such as:
- Build an emergency fund with about 6 months’ salary before you start accelerating repayment of your student loans.
- Maximize the employer match on contributions to your 401(k) or other retirement plan.
- Become financially literate by buying a good introduction to managing your money, such as Suze Orman’s The Money Book for the Young, Fabulous & Broke or Beth Kobliner’s Get a Financial Life: Personal Finance In Your Twenties and Thirties. Also, subscribe to Consumer Reports magazine.