More than half of college attendees wind up borrowing money to pay for school. Which means paying these loans back is one of the biggest financial challenges facing young people today. How student loan repayment fits into your financial plan is largely going to depend on your personal circumstances and goals, but we still want to go over some of the most common ways to pay back federal student loans, and what to consider when selecting a repayment method.
Prioritize your debt
Paying off student loans can feel like a top priority, especially if the dollar amount on your balance is high. But there are more factors at play. A lot of times, interest rates on student loans are better than on consumer debt, so there needs to be a hierarchy when it comes to prioritizing payment. If you have credit card debt, for instance, you’ll want to pay that off first while paying at least the minimum on your student loans.
Generally speaking, we’ll advise you to pay what makes the most sense according to your budget. That may be the standard option, but it may not be.
Sometimes, the graduated or extended repayment plans will make more sense. This can keep your mandatory monthly payment lower at first. While this type of plan ultimately leads to higher total interest payments, it also creates a unique potential opportunity.
With lower mandatory payments, you may be able to pay extra each month which would apply straight to your principal. This strategy can help you chip away at your overall total.
For example, if your prescribed payment is $150, paying $200 each month isn’t a big shift—you won’t be redirecting large amounts away from saving or other goals. But that little bit toward principal alone can add up quickly.
Beyond these basic methods, there are two options for repayment that may qualify you for loan forgiveness if you pick a field, such as teaching, that may have lower earning potential in pursuit of public service. Keep in mind: Both of these options come with a bit more paperwork, as you’ll need to update your information, including income, on a yearly basis. Your spouse’s income may also be taken into account. But if these seem like options that make sense for you, we’ll go over the details and how to plan accordingly.
Deferment and forebearance
Regardless of how you choose to repay your loans, you may encounter the option to put your loan into deferment and/or forbearance. Both are temporary suspensions of loan payments, but the terms are different. When a loan is deferred, usually when a student is still in school, interest does not accrue. With forbearance, interest can still accrue (though it doesn’t always).
For instance, when the government created student loan forbearance tied to COVID-19, interest did NOT accrue during the moratorium, giving folks an opportunity to make a dent on principal if they were able to continue making payments. Loan servicers, on the other hand, might place your repayments into administrative forbearance for a period of time, sparing you payments but not interest.
Sometimes deferment and forbearance can be automatic, while other times they must be approved. Deferment and forbearance can be a useful tool, but postponing payments isn’t always a positive. The most important thing with both deferment and forbearance is to be aware of the terms and to know how either will affect your repayment plan.
Student debt and your budget
Ultimately, when we craft a repayment plan with clients, we look at student loans as part of your broader financial picture. We mentioned balancing student debts with other debt earlier in this article. We also want to balance your overall debt with your short- and long-term goals.
Often, we advocate for a disciplined budget that focuses on paying down debt to create more of a springboard for the future. With debt payments out of the way, you may have more flexibility to seize opportunities or balance new priorities as they emerge.
If you have questions on repaying student loans or saving to pay for your child’s college, we are here to help.
