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Crash course: Paying off your student loans

 
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July 23, 2014

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Now that you're out of college, is fitting your student loan payment into your budget harder than any problem you faced in math class? If so, a crash course in student loan repayment budgeting might help.

“You got your degree and threw your cap in the air, and now it's time to repay all that money you borrowed,” says Bruce McClary, government relations and public policy manager for ClearPoint Credit Counseling Solutions. “You've got to prioritize your budget items and focus on your goals.”

If you do, there's a good chance you can live comfortably, make your payments on time and even get your loan paid off early. Here are seven student loan repayment budgeting tips:

  1. Start with budget basics. If you've never put together a monthly budget, start now, McClary says. ClearPoint offers an online budget worksheet that includes student loan payments and other common expenses, from housing to entertainment to pet care.

    While you work on your budget, see what your monthly payment would be with different student loan repayment options, says Heather Jarvis, an attorney and student loan expert. To get monthly payment amount estimates, go to StudentLoans.gov and plug your loan amount, interest rate and income into the repayment estimator. Payments can vary widely, starting at under $100 a month.

  2. Choose the best payment plan option. If you've got federal student loans, repayment options include standard repayment, in which you pay a fixed amount each month for a certain period of time — usually 10 years. Other options, such as income-based repayment and Pay As You Earn, use your salary to help determine your monthly payment.

    The options that take income into account usually offer the lowest monthly payments, but you'll probably end up paying more overall due to interest, Jarvis says. “You're really trying to find the right balance between paying quickly and aggressively and enabling yourself to have the cash flow you need on a monthly basis,” Jarvis says.

    If the total amount you owe in student loans is equal to or more than your total yearly salary, “that's when the income-based repayment options can be a wise choice,” she says.

  3. Build an emergency fund right away. If you don't have an emergency fund, make it a priority to build one, Jarvis says. You'll be glad you did when you're hit with a financial crisis — for example, your transmission dies, you break your ankle or you need to fly to visit a sick relative. A cushion of even $2,000 can give you the cash to cover the crisis and still allow you to keep paying your monthly obligations, such as your student loan bill.

    Jarvis says: “You don't want to be in a situation that causes your whole financial picture to crumble.” If you do find yourself in a pinch and you're temporarily unable to make your student loan payments, communicate with your lender right away, Jarvis says. The lender can discuss options such as forbearance, deferment or even switching to an income-based repayment option, Jarvis says.

    But because federal student loans are so flexible, it's easy to make the mistake of stopping payments temporarily through forbearance or deferment when you don't need to, Jarvis says: “Then you end up paying more over time.”

  4. Pay more than the minimum. Student loans are like credit cards in one way: Paying only the minimum can keep you in debt for a long time and cost you big bucks in interest. For example, a student loan calculator at FinAid.org shows that if you owe $25,000 at 4.6 percent interest, and you pay the minimum of $260.30 a month over 120 months, you'll shell out over $31,000 total — including more than $6,200 in interest.

    But if you can scrounge up just $10 extra a month — less than the cost of a pizza — you could cut five months of payments and more than $300 off your total. If you can find $50 extra a month, you can reduce your loan term by two years and save almost $1,300. “Even a little bit helps,” McClary says. “But if you can really double down and double or triple your payment, the savings increase exponentially.”

  5. Make sure extra payments get applied the right way. When you pay more than your monthly minimum payment amount, your student loan servicer can and will first put any extra money toward unpaid or accrued interest, as well as any collection costs and fees, Jarvis says.

    After that, any extra can be applied to your principal balance. But, here's where it gets tricky: If you pay more than one monthly payment at a time, the normal procedure is to postpone the next payment due date, which probably is not what you intended when you sent in the additional funds. When you pay extra, include a letter instructing your loan servicer to apply extra funds to any higher interest loans first, rather than applying it equally across loans, Jarvis says. Let the servicer know that you don't want your next payment due date pushed out, she says.

  6. Find big and small ways to cut spending. One way to save money: Pretend you're still a college student for a few more years by looking for bargains wherever you can, says Andrew Josuweit, CEO of Student Loan Hero, which offers student loan repayment calculators, tools and advice. For example, Josuweit, who is repaying his own student loans, says he could pay $100 a month to go to a fancy gym called Crunch, but he instead pays $70 every six months to work out at New York City parks and rec facilities.

    Entertainment is a good place to save, too, and you can choose free summer concerts over shelling out $50 or more to see a show, he says. Look at big-ticket items as well, experts recommend. For example, avoid splurging on an expensive car with fancy upgrades and stick to basic transportation, McClary says. And look at ways to save on housing, which might be your biggest expense, Jarvis says: “It's not the lattes that get us.”

  7. Get creative to earn extra. “The biggest issue student loan borrowers are facing is income,” Josuweit says, noting that some borrowers are defaulting because of budget shortfalls of $50 or $100 a month. So, if it's a squeeze to make your minimum payment each month or you want to find the cash to pay off your student loan early, consider using your assets to make money, Josuweit says. For example, take a weekend trip to visit family or friends once a month so you can rent out your apartment or house for a few nights on Airbnb. In New York, you can make $200 a night renting out an apartment, says Josuweit.

    You also could use your car as a taxi through Lyft, or pick up some freelance work on Elance.com, he says. “A lot of people don't know these opportunities exist,” he says.

And, finally, avoid temptation to rack up credit card or other costly debt while paying down your student loans, McClary says: “That debt will just pile up and work against you.”


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