As college debt soars over $1 trillion in the U.S., students across the nation are struggling to pay for their degrees. Rising college tuitions, a hyper-competitive job market, and a tough economy are only making it harder for recent graduates to settle up and escape the financial burdens of debt. Beginning to pay off what seems like endless student loans is certainly scary, but you're not alone: according to the Federal Reserve Bank of New York, 37 million Americans hold outstanding student loan debt. We asked the experts for their advice on the steps that you should take to begin to pay off your loans slowly and steadily.
Know exactly whom you need to pay.
"The first thing you need to do is have a clear idea of who you owe money to," says Heather Jarvis, an attorney who specializes in student loan law. "Go to the National Student Loan Data System, pull together a list of your loans, and figure out when your first payment will be due. For most people, there is going to be a six-month grace period before your first payment is due, but it can vary. Check your paperwork or contact your lender so you know when your first payment is due."
Track your spending and set a budget.
"Go through a budgeting exercise where you track all of your spending for a month, and classify it into categories like food, clothing, housing, and student loans," says Mark Kantrowitz, the publisher of FinAid.com and FastWeb.com. "See how your mandatory versus discretionary expenses compare with your income. If your total necessary expenses exceed your total income, you're in a very difficult situation. You should try and find ways to increase your income, such as getting a part-time job on evenings or weekends, or cut costs by moving home or packing your lunch every day."
Start by paying your interest.
"If you can pay at least the interest that's accruing on your student loans, that can save you a lot of money since interest can capitalize, which means it gets added on to the principal," says Jarvis. "That can get really expensive because you end up paying interest on interest."
Consider deferment or forbearance if you're in a temporary bind.
"If you default on your loans, you lose the options of deferment and forbearance," says Kantrowitz. "So if you have a temporary financial difficulty—say you expect to get a job within a few months—you can get a deferment or forbearance to temporarily suspend obligations to make payments. These aren't long-term solutions because interest can continue to accrue and you can dig yourself into a deeper hole, but if it's a three-month period in which you're not going to be employed, deferment and forbearance can be reasonable options."
Note: A deferment is a temporary suspension of loan payments during which interest does not accrue. You may qualify for a deferment if you're unemployed, enrolled in a graduate program, or serving in the military. Forbearance can be granted to those who are not eligible for a deferment; it is a temporary postponement or reduction of payments during a time of financial difficulty, but you must pay interest.
Think about consolidating your loans.
"If you want to work for a non-profit or the government, your loans will need to be consolidated in order for you to be eligible for a program called Public Service Loan Forgiveness," says Jarvis. "Consolidation can also make sense for people who have older student loans that have variable interest rates, or for people who have federal student loans that they borrowed before 2010."
Choose your repayment plan carefully.
"When you have to start repaying your loans, you get to choose from a number of repayment options," says Jarvis. "If you don't choose, then your federal loan payments will automatically be set on a standard 10-year repayment schedule. If student loan borrowers are still looking for employment, they should think about income-based repayment, which has certain options for people who are not working or who are making less income than they would have anticipated. There are other ways to postpone making loan payments, like certain kinds of forbearance or deferment, but those are not always the best choices."
Lower your monthly payments by extending the term of the loan.
"Look for payment plans that reduce your monthly payment by stretching out the term of the loan," says Kantrowitz. "The two main options for doing this are income-based repayment and extended repayment. Income-based repayment bases your monthly payments on your discretionary income—and not how much money you owe—so it reduces the monthly payment to a reasonable level."
Utilize online resources.
"Get as much information as you can—there are a lot of great resources," says Jarvis. "The Department for Education has a lot of information on its website, and many schools have excellent financial aid offices that are there to help their graduates even after you're not in school. The National Consumer Law Center has a great website too."
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