Recent college grads soon must begin repaying loans
Q: The six-month grace period for repaying college loans soon will end for recent graduates. Meanwhile, CNBC recently reported that student loan balances are expected to top $2 trillion by 2022 and 40 percent of borrowers are expected to fall behind on their loans by 2023. How can students get into the practice of repayment so they don’t default?
A: Pretend you’re already paying and start your emergency fund. Log in to your accounts now and find out what your payment will be. Next, create a budget where you start setting that much aside each month in a separate savings account. Not only will this help make the payments less stressful when they’re due, but it also will help you establish the start of your emergency fund, one of the pillars of financial security. You should build three to six months’ worth of living expenses, but it will depend upon your situation. However, any emergency fund is better than no emergency fund, so don’t let the higher amount scare you into not saving at all.
Q: Is it better to keep your payments small and manageable or opt for higher payments to pay off the debt sooner and pay less interest?
A: It is important to choose your repayment plan wisely. Federal student loans have a variety of repayment plans available. Before opting for the lowest payment, pay attention to the amount of interest you’ll pay over the life of the loan. The standard repayment plan of 10 years of level payments may be the highest amount per month, but it’s also the lowest amount of interest, which means less out-of-pocket money overall. Try for that option if you can. If you simply can’t afford that monthly payment, it’s OK to choose an income-based or graduated plan. Remember you always can pay more than your monthly payment if you find extra money in your budget.
Q: How can borrowers keep from stressing about these loans?
A: Versus thinking about what that dollar amount could buy, remember what it did buy: your education and ability to earn a higher income throughout your life. Student loan debt is an investment — much like a mortgage is an investment in a home. It will pay off for the rest of your life.
Q: What happens if I start making payments and a financial situation occurs that prevents me from paying my student loans?
A: As with all other debt, contact your loan servicer to make alternative payment arrangements. You might qualify for a deferment that allows you to temporarily stop making payments or to reduce the amount of your payments. It’s most likely that interest will continue to accrue on your loan, so you want to keep the deferment period as short as possible. But remember, your overall goal is to avoid defaulting on your loan.