Benjamin Franklin once said, “An investment in knowledge always pays the best interest.” While that sounds nice, I doubt he had student loans to repay. But you do—yikes—and the payments are looming (or are already here). So no matter when you graduated or what your current financial situation is, we’ve put together a guide to finding the best repayment options for you.
Don’t Be Afraid to Call Your Lender
Let’s go from the worst-case scenario to the best. If you’re still looking for work, but have a payment approaching that you can’t make, call your lender. They’ve been around the block and have seen it all before—which means they’ll have deferment or repayment plan options for you (just be sure to ask what impact those options will have on your credit score).
If you’ve scored a job but your salary still leaves a lot to be desired, you’ve also got choices—lenders offer graduated repayment plans that enable you to make smaller payments now and larger payments later on. Just remember that, with a graduated plan, you’ll end up paying more in the long run, because the less you pay off of the principal today, the more interest you’ll end up tacking on to the loan. However, if you expect your salary to increase dramatically from what you’re earning now, the convenience of making smaller payments while you’re just starting out your career can definitely be worth the extra you’ll shell out over the term of the loan.
See if You’re Eligible for Income-Based Repayment
There’s another option, too: Obama is offering a repayment plan based on not only your income, but your discretionary income—the amount you earn after taxes and personal necessities like food, housing, and clothing. The plan will be available to 1.6 million eligible participants—use this calculator to find out if you are one of them. And if you don’t qualify this time around, you’re not out of luck: The president has proposed widening the program under his “Pay as You Earn” plan for 2014.
OK, now for the best-case scenario. You’ve got a job that pays you well enough—but you’re just not sure how to begin tackling your student debt. First, decide if consolidating your loans will lower the overall amount you’ll pay. If you borrowed loans from the federal government, you can use their online loan calculator to check this out. (Not sure if you took out a federal loan? You did if the only application you filled out was a FAFSA. If you’re still not certain, check out the government’s Consumer Finance Protection Bureau website for more info.)
If you took out private loans, you have more consolidation options, but you’ll need to call your lenders to see exactly what they are. They’re going to give you a load of information, so take notes, but the most important thing to understand when you get off the phone is this: the total amount you will pay (including principal and interest) if you do or do not consolidate. Also ask whether you’ll lose any borrower privileges, such as interest rate discounts after a series of timely payments.
Got Extra Cash? Examine the Bigger Picture
Once you’ve settled on whether or not to consolidate, know your interest rate, and have determined the monthly payments you’ll be making, look at your bigger financial picture. And if your hard work has earned you lower payments (yeah!), decide what to do with the extra cash.
First, treat yourself to a dinner out or that top you’ve been eyeing—you’ve earned a reward! Then compare the interest rate you’re paying on your loans to the savings rate you would receive if you invested in a savings account or other savings vehicle (the options you’ve got for saving are a whole other story). If the savings rate is higher than your loans’ interest rate, then go ahead and save. But if the interest rate is higher than the savings rate, put the extra money toward paying down those loans.
Even if it’s little by little, it will feel really good to put your loans behind you—closure is a beautiful thing. That sounds a lot more like Carrie Bradshaw than Benjamin Franklin, but hey, I bet she had student loans.