Congratulations! You've walked across the stage, collected your diploma, and landed your first career job. Cha-ching! That’s the register ringing up all those student loans that are now due. It's time to get your financial house in order to keep your student loans from chewing through your early-career salary so that you can also save and invest while making those student loan payments.
There are tools that can help recent grads control their debt and free up investing dollars for the long haul: plans for extended repayment, loan consolidation, and automatic enrollment.
Know What You Owe
Although it may seem like a no-brainer, many students don't keep track of the tally as they sign student loan forms year after year in college. Get organized. Grads should gather all of the loan documents, including award letters, promissory notes, and disclosure documents, says Jean Wilczynski, financial advisor at Exencial Wealth Advisors. "Put all of the details for each loan in the same place," such as a spreadsheet or even a simple list, she says. Those details should include:
- Amount of loan
- Interest rate
- Term: length of repayment period
- Monthly payment information: amount due, due date, where payment is to be sent
- Co-signers, if applicable
- Note if federal or private loan
"Different types of loans have different rules, and you want to understand what you have so you know what types of options may be available to you,” Wilczynski says. “Federal loans may be subsidized or unsubsidized. Some programs are only for subsidized loans, while others are available for all federal loans but not for private loans." New grads can compile data about federal loans by using the Department of Education's central database, the National Student Loan Data System (NSLDS).
Getting the details on private loans can take a little more work, since there isn’t a single database to check. "It’s still doable,” Wilczynski says. “Check your credit report, which should include contact information for creditors like your loan servicer. You can also ask your school for help. Your college’s financial aid office can help you to identify which company—loan servicer or bank—owns your loans." Remember, too, that loan servicers do change, so you may need to update that information at some point.
The next step is to calculate a rough estimate of your monthly expenses compared with your income. It should quickly become clear if you have enough income to cover your monthly expenses plus your loan payments. "If you have enough, great. If not, don’t panic. There are many programs that you may be able to tap for help," Wilczynski says.
Typical student loans have fixed interest rates with a 10-year payback period. If you have a number of loans with different payments, due dates, and interest rates, setting up your repayment plans can get complicated. But there’s a way to simplify and maybe even save some money.
"Some loan servicers may reduce your interest rate slightly if you sign up for automatic payment plans,” Wilczynski says. “These plans typically allow the loan servicer to automatically withdraw your monthly payment from your bank account. That can help ensure payments are made on time and to the right companies.
“Even if you are sure you will have funds in your account,” Wilczynski says, “you may want to set up some reminders to check your balances, as you could incur overdraft fees if you do not have sufficient funds to make the payments."
Consolidate Those Loans
Consolidation is a personal finance tool that works for all kinds of loans. It involves combining several loans into a single, larger loan, which also helps grads get organized and simplify.
Better yet, this could be another money saver. "In some cases, you may be able to reduce your interest rate or payments, which could substantially reduce the amount you end up paying over the life of the loans," Wilczynski says.
Not All Repayment Plans Are Equal
Many financial institutions and the federal government offer income-based repayment plans that will reduce monthly payments based on your income level. Generally, proof of income will be required, and payments are adjusted up or down based on changes in income.
- Graduated repayment plan. Payments start low and increase about every two years up to 10 years. Consider this if you expect your income to grow faster than your other expenses, Wilczynski says.
- Extended repayment plan. Monthly payments can be fixed or graduated, but the term is extended up to 25 years. "This is a good option if you expect your ability to make payments to remain the same and want to lower the payment to a more manageable amount," Wilczynski says.
There are good resources available, including the aforementioned National Student Loan Data System (NSLDS); Federal Student Aid from the U.S. Department of Education, which also offers a guide to repaying your loan; and the student loan section of the National Foundation for Credit Counseling.
What’s Left Over
Now that you've got your monthly loan payments in place, it’s time to start thinking about what to do with the rest of your paychecks.
Don’t consider those funds as play money just yet. If you haven’t already, start contributing to your employer's retirement plans and set up an individual IRA that you will continue to add to until you retire. Any leftover resources can be used to begin investing for your life goals.
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