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How to Save Money and Conquer Student Loan Debt From Day One

THE SMART GRAD’S GUIDE TO

STUDENT LOAN REPAYMENT

May your life after graduation be a reflection of everything you’ve worked hard for – a fulfilling

career, stable finances, happy life and much more.

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CONGRATULATIONS NEW GRADUATE!

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And if you’re one of the 7 in 10 people graduating with student loan debt,

may your student loan repayment strategy set you up for success right from the start.

Because make no mistake – student loan repayment does require a strategy.

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. . . and can hold you back from achieving other financial goals - like buying a home, starting a family and traveling the world.

It may seem as simple as picking a student loan repayment plan, but the decisions you make today impact how much interest you’ll end up paying in the long run . . .

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A smart student loan repayment strategy ensures you don’t spend a penny more than is necessary.

To start your student loan repayment strategy on the right track, follow

these six important steps.

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For federal student loans: National Student Loan Data System (NSLDS)

For private student loans: §  Gather paper statements §  Ask your school’s financial aid office §  Pull your credit report §  Check the Clearinghouse Meteor Network §  Contact your servicer

1 KNOW  WHAT  YOU  OWE  

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Make a list of your loans’ attributes, including: 2 WRITE  IT  DOWN  

Type (e.g., federal vs. private, subsidized vs. unsubsidized, fixed-rate vs. variable-rate)

Balance

Interest rate

Term

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Most federal and some private loans offer a grace period between the time you graduate and the time you're required to make your first payment. In many cases, interest continues to accrue during the grace period and is capitalized, or added to the loan's principal, when repayment begins. If you don't make payments during the grace period, you can end up paying more in interest over the life of the loan.

3 UNDERSTAND  THE    GRACE  PERIOD

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120

110

100

104

108

112

116

120

124

No payments during grace period

Regular payments during grace period ($555/month)

LOAN TERM (in months)

Her minimum monthly payment will be about $555 after grace period ends. Here’s how paying $555/month during grace period affects her bottom line.

EXAMPLE:

$16,612

$13,964

$12,000

$13,000

$14,000

$15,000

$16,000

$17,000

No payments during grace period

Regular payments during grace period ($555/month)

TOTAL INTEREST COST

A college grad finishes school with $50,000 in student loans at a weighted average interest rate of 6% and a 10-year term.

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BOTTOM  LINE: Use the grace period if you need it, but if not, consider making at least interest-only payments during this timeframe in order to minimize interest costs.

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Federal student loans offer a choice of repayment plans, including: 4 PERUSE  THE  PLANS

A private loan’s repayment plan is based the terms of the loan (e.g., 10- vs. 20-year term, fixed vs. variable interest rate).

STANDARD 10-year term; generally the highest monthly payment but lower lifetime interest

GRADUATED 10-year term; payments start low and increase over time

EXTENDED Up to 25-year term; lower payments at a fixed or graduated amount

INCOME-DRIVEN Including Pay As You Earn or PAYE and Income-Based Repayment or IBR; 20-25-year term; lower payments based on income

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While it’s tempting to choose the repayment option with the lowest monthly payments, the long-term repercussions can be costly.

5 DO  THE  MATH

Generally speaking, the longer the repayment term, the more you'll spend on interest over the life of the loan.

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Here’s how his bottom line is affected by choosing a standard versus extended repayment plan.

EXAMPLE:

An MBA grad finishes school with $100,000 in student loans at a weighted average interest rate of 7%.

$1,161

$706

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Standard Plan (10-Year Term)

Extended Plan (25-Year Term)

MONTHLY PAYMENT

$39,330

$112,035

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

Standard Plan (10-Year Term)

Extended Plan (25-Year Term)

TOTAL INTEREST COST

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BOTTOM  LINE: Go for the lower payment if you need to, but be sure to revisit your repayment plan on at least an annual basis. The sooner you switch to a more aggressive plan, the more you’ll save – and the sooner you’ll be done with your loans.

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If you have high interest rate student loans, you may consider refinancing those loans at a lower interest rate. Refinancing student loans can potentially allow you to:

6 CONSIDER  REFINANCING

ü  Save money on total interest

ü Make lower monthly payments

ü  Pay off loans sooner

ü  Simplify monthly bill through loan consolidation

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Here’s how her bottom line is affected by refinancing and reducing the interest rate to 5% and keeping the 10-year term.

EXAMPLE:

A doctor finishes med school with $100,000 in student loans at a weighted average interest rate of 7% and a 10-year term.

$1,161

$1,060

$1,000

$1,040

$1,080

$1,120

$1,160

$1,200

Before Refinancing (7% Interest Rate)

After Refinancing (5% Interest Rate)

MONTHLY PAYMENT

$39,330

$27,278

$0

$10,000

$20,000

$30,000

$40,000

$50,000

Before Refinancing (7% Interest Rate)

After Refinancing (5% Interest Rate)

TOTAL INTEREST COST

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The better shape your finances are in, the more likely you are to qualify for a lower rate. Most private lenders require:

Completion of undergraduate degree

In good standing with current student loan

Strong monthly cash flow

Good credit score (typically 700 or higher)

WHO  CAN  REFINANCE    STUDENT  LOANS?

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When you refinance federal student loans with a private lender, you give up federal loan benefits such as:

§  Loan forgiveness programs (for public service, teaching and military professions)

§  Loan deferment and forbearance (although some private lenders do offer the latter)

§  Graduated, extended and income-driven repayment plans

BEFORE  REFINANCING  FEDERAL  STUDENT  LOANS.  .  .

If you need these benefits, think twice before refinancing federal student loans.

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BOTTOM  LINE: Refinancing can be a great way to save money and efficiently deal with student loan debt, and there are no fees to apply. Even if you don’t qualify for a better rate today, make sure to check back periodically – especially if your credit score and income improve over time.

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Which repayment plan will you choose?

Will you make payments during grace period?

Should you consider refinancing any of your loans?

PUTTING  IT  AL

L  TOGETHER

Revisit your list of loans from step two

and decide on a plan of attack:

ü  Consider signing up for automatic payments (usually comes with a 0.25% reduction in interest rate)

ü  Call your student loan servicer with questions

ü  Set a reminder to revisit your repayment strategy on an annual basis

FINAL  TIPS

§  Can  you  switch  to  a  more  aggressive  repayment  plan? §  Are  you  now  eligible  to  refinance  loans  at  a  lower  rate?

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Check out the SoFi blog

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For more information

sofi.com This piece is intended to provide useful information on the subject of student loans, but does not purport to provide legal or tax advice.

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