Navigating Student Loan Repayment: DOs and DON’Ts

Now that the federal student loan payment and interest pause has ended, it’s more important than ever to understand all your student loan debt options, get clear on your repayment plan, and strategize for the future. Due to recent changes to federal student loan forgiveness programs, you may have more choices than you realize.

Read on for the top DOs and DON’Ts of student loan repayment, including making payments on time, enrolling in the right plan, and taking advantage of federal programs.

DOs: Student loan repayment

For both private and federal loans, there are a few non-negotiable factors when it comes to repayment.

1. Understand your repayment plan

Understanding the fine print on your repayment terms is crucial to managing your financial obligations. You should be familiar with all the details, such as your repayment schedule, interest rates, and consequences of late or missed payments (there are usually broad consequences, as well as specific ones pertaining to your loan terms). This will help you avoid inadvertently accruing additional fees or negatively impacting your credit score.

2. Make timely payments

Making your student loan payments on time, every time, is essential to avoid penalties. These penalties can come in various forms, such as late fees, increased interest rates, and a negative impact on your credit score. Late fees can significantly add to the total cost of your loan if they accumulate over time, and your interest rate could even potentially increase as a penalty, causing the amount you owe to inflate further.

Where do I pay my student loans?

Paying your student loans can be accomplished through various platforms and methods. The most straightforward approach is to make payments directly on your loan servicer’s website. You can either pay manually each month or set up automatic payments by enrolling in AutoPay.

Another option is using your bank’s online bill pay or direct debit service, where you can arrange for payments to be sent to your loan servicer. For online bill pay, ensure the payment details, such as the account number and payee, are accurate. Setting up direct debit allows your bank to automatically transfer the loan payment from your account to the loan servicer on a set date each month. This is another way to help ensure on-time payments.

Additionally, there are mobile apps provided by most loan servicers, allowing you to manage and make payments directly from your smartphone. If you prefer the old-school approach of paying by check or over the phone, that may also be possible. Check the terms of your loan and servicer agreement to determine the best payment method.

3. Consider refinancing

If you have private loans, refinancing can potentially lower your interest rates. If you have federal loans, refinancing is also an option, but note that refinancing federal loans with a private lender means you will lose access to federal repayment and forgiveness programs and their associated benefits.

Understanding interest rates and fees

Interest rates and fees can significantly influence the total amount repaid on student loans. The interest rate, expressed as a percentage of the principal loan amount, is the cost of borrowing money. It accrues over time, adding to the outstanding loan balance. Therefore, a higher interest rate implies a higher overall cost of the loan.

Fees, on the other hand, are additional charges incurred for processes associated with the loan. For instance, some loans may have origination fees, which are one-time charges for processing the loan. These fees are usually added to the total loan balance and may accrue interest over time if unpaid.

Both interest rates and fees increase the total repayment amount. For example, if a $10,000 loan has an annual interest rate of 5% and an origination fee of $200, the actual loan cost would be $10,200 upfront. Over a 10-year term, this loan would accrue $5,000 in interest, yielding a total repayment amount of $15,200.

If you’re refinancing an existing loan, it’s important to understand the implications of each lender’s fees and interest schedule.

DON’Ts: Student loan repayment

As you repay your loans, avoid the following missteps, which could have a longstanding impact on your loan status, repayment options, and credit history.

1. Don’t miss payments

Just as making payments on time is a “do,” missing student loan payments is a major “don’t.” Missing payments can lead to serious repercussions affecting your financial life. As discussed, you may initially be charged a late fee, adding to the total amount owed. If the missed payments become a pattern, your loan may enter a state of delinquency, which is reported to credit bureaus and can significantly impact your credit score. A poor credit score can make it more difficult for you to qualify for future credit cards, mortgages, or even rental agreements.

If delinquency continues, the loan may enter into default, a status with additional consequences. In this case, the total balance of your loan, including interest, becomes due immediately. Defaulting on a loan can also lead to wage garnishment, (in which a portion of your salary is withheld to pay off the debt) or the withholding of tax refunds. Additionally, defaulting on your student loans can disqualify you from helpful repayment plans or other benefits associated with the loan.

2. Don’t skip the benefits of federal loans

Unlike private student loans, federal student loans are typically eligible for flexible repayment plans and potential loan forgiveness through different government programs. Federal student loan repayment plans might involve fixed or graduated payments over a certain period. Learn more about these plans with Laurel Road’s Guide to Federal Student Loan Repayment Programs.

Income-Driven Repayment

Income-Driven Repayment (IDR) plans calculate monthly payments based on your discretionary income and family size. Of particular note is the newest IDR plan, known as SAVE, which offers the lowest monthly payments and quickest path to forgiveness.

Student Loan Forgiveness

Student loan forgiveness is a feature of IDR plans as well as the Public Service Loan Forgiveness (PSLF)¹ program. Under certain circumstances, the remaining balance of your student loans can be forgiven after a certain number of years, meaning you are no longer required to make payments.

The process of applying for student loan forgiveness can be complex, but it is worth it. The first step is understanding which student loan forgiveness programs you might be eligible for. Several programs are available, including PSLF, Teacher Loan Forgiveness, and various state-based programs. Criteria for eligibility vary between programs but often include certain types of employment, such as working for a nonprofit or government agency or in a high-need field or location.

3. Don’t neglect other financial goals

It’s essential not to let student loan repayment overshadow other financial goals. On one hand, focusing on paying off student loans can relieve debt stress and save on total interest. On the other hand, neglecting to save for retirement, build an emergency fund, or invest in assets could delay financial stability and growth. Consider a balanced approach that advances loan repayment while also addressing other financial priorities.

Accelerating repayment

There are several strategies to accelerate student loan repayment, such as making extra payments, refinancing private loans, and building and managing a smart budget. You can learn more about how to save, budget, and analyze your options in this guide to the best way to repay your loans. Remember, every financial situation is unique. Therefore, it’s crucial to create a plan that is tailored to your individual circumstances and long-term goals.

Creating a repayment plan that works for you

Creating a personalized repayment plan begins with a comprehensive and clear-eyed view of your financial situation and long-term goals. It’s essential to understand your loan terms, your future options, and your payment schedule. If you have federal loans, don’t overlook the repayment and forgiveness options that may be available to you. Or use a student loan calculator to better understand whether refinancing or a more aggressive payment schedule on your private loans might be the right choice.

The key to a successful repayment strategy is knowledge – and flexibility. Your financial situation and goals can change over time, so it’s essential to review and adapt your plan regularly. Consulting with a student loan specialist can help you make informed decisions and navigate the complexities of student loan repayment.