How To Manage Your Student Loans Before The Grace Period Ends | Student loans and advice

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Ah, the joys of a grace period. Six months of happiness ignoring the fact that you have to start making regular student loan payments for a decade or two. Recent graduates entering this phase of arrested financial development would be best served by using the six months to create an airtight debt repayment strategy. Follow the five steps below to achieve this.

Step 1: Find your student loans.

First, you need to find all your debts.

Tracking down federal student loans is a relatively painless process. You should start with the National Student Loan Data System. The site serves as the central database for the US Department of Education.

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You will need a Federal Student Aid ID to access this and other Department of Education sponsored student loan websites. Creating an FSA ID will require your social security number, date of birth, and name.

Once logged in, you will see the “Help Summary”, which provides a breakdown of all your loans, including type, amount, date, outstanding principal and outstanding interest. You can also click on loans to find the loan manager, which is important information because you will eventually need to contact your loan manager.

Finding private loans can be a little more tedious as they are not easily housed in a government database. But make a copy of your credit report from the three credit bureaus is a good place to start. You can also contact your college’s financial aid office.

Keep in mind, private student loans you don’t have to offer a grace period, and you may owe soon if you have a loan from a private lender.

Step 2: Make interest-only payments.

You may want to stick your head in the sand for a grace period. After all, that’s six months without factoring debt into your budget. But instead of completely ignoring the problem, consider paying interest only. Many loans accrue interest during the grace period, which then compounds (adds to the principal) when you start making regular payments. You can reverse some of the damages caused by this interest by making interest-only payments during the grace period.

Federally subsidized Stafford loans and Perkins loans generally do not accrue interest during the grace period, so any payments made on these loans will go 100% toward principal debt during a grace period. It’s a great way to prepare yourself for a more comfortable debt repayment.

Step 3: Learn about forgiveness programs and income-based repayment plans.

While no one wants to be in debt, having federal loans makes debt management a little easier.

Federal student loans (except PLUS Loan and Direct Consolidation Loans) are eligible for income-based repayment plans. There are three types of income-based repayment plans: Reimbursement based on income, Reimbursement based on income and Pay As You Earn.

Each program’s parameters and eligibility vary, but all offer the ability to lower your payments based on your income and family size. This makes loan repayment more affordable and prevents lenders from getting more than 10, 15, or 20 percent of your discretionary income, depending on the plan. You can also have any remaining balance on loans canceled after 20 or 25 years.

Canceling student loans is another viable option for getting out of debt. You will still have to make payments (often 120 consecutive payments), but there are a myriad of forgiveness options available to graduates. These programs are usually tied to your occupation and contain stipulations about where you can work and how long you must stay there before you are eligible for remission.

For example, the Teacher Loan Forgiveness Program offers up to $17,500 in debt forgiveness. A teacher must work full-time for five consecutive years at an eligible elementary or secondary school that serves low-income students.

Step 4: Round up your payments.

Lenders will decide your minimum payment each month. But there is a little trick you can use to start digging the hole faster: Simply round off. If your monthly payment is $180, start paying $200.

You must tell your lender that any additional money you pay is not to be allocated to future payments. Lenders don’t want you to pay off your debt any faster, so they have a sneaky way of applying extra money to “future payments” instead of current payments, and so the money is applied to interest and not to principal balance.

Step 5: Consider refinancing to lower interest rates.

Student loan refinancing is the last option to better manage your debt. Refinancing offers the ability to move your debt to a lower interest rate and consolidate all of your loans into one loan, eliminating the hassle of multiple payments.

New entrants to the student loan refinance space, like SoFi, Earnest, and CommonBond, are shaking up traditional lenders and offering both variable and fixed rates. SoFi, for example, offers fixed rates as low as 3.50% and variable rates as low as 1.90%.

Remember that if you refinance federal student loans, you will no longer have access to federal benefits such as income-contingent forgiveness and repayment programs, as well as forbearance and deferment.

Six months to prepare for success

The grace period is designed to give new graduates leeway between graduation and payment. This gives you time to find a job and learn how to budget. Just make sure you’re also setting yourself up for financial success — and shorter debt repayment — by following these steps to create a debt-free plan. Good luck!

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