Blog Post

How to Prepare for Battle Against Student Loans

Date Published: Jun 24, 2021

Two students sitting on grass happily working on computer

So, you finally did it, you graduated from college and have freed yourself from the stresses of summer ending, homework, and studying for those nerve racking exams and earned yourself that coveted degree. Along with a fancy degree, you may also be leaving with a backpack full of student loan debt.

This is something that is usually expected after graduating, but personally dealing with it can make studying for finals seem like a walk through the halls of a university. Wildfire is here to help you though, and provide you with some tips and strategies to unload that backpack of student loan debt.

Knowing Your Enemy (Debt)

In order to prepare to take on student loans, you need to figure out just how much your total debt is so you can develop a strategy to take it on. You will also need to study the terms of each loan you have, for different loans could have different interest rates and different payment rules. Reviewing your loan terms will help you build a plan that avoids extra interest, fees, and penalties.

While you collect all of these notes you will at some point learn that each loan has a grace period or a certain amount of time you have after graduating to start making payments. These grace periods can differ in between loans, for example,     one loan you have may have a three month grace period and another may have a nine month grace period. Knowing all you can about your students loans will prepare you to begin knocking them out (Epstein, Investopedia).

Know Your Interest Rate

Once you determine how much you owe, you then need to understand how much your loan is going to cost you. You may  be subsidized on your loan, which mean that you were not accumulating interest while you were taking classes, because the U.S. Department of Education was taking care of the interest part for you.

The other hand is unsubsidized, which is where you start gathering interest right when you take out the loan. So, if you were not paying interest while in school, you may already owe more on the loan than what you originally took out.

To figure out how your interest adds up on your student loans you will simply need to refer to a simple equation. For example, say you have a loan that is $9,000 with an interest rate of 3.96%. Your monthly cost would then be $9,000 x (3.96% / 12) or $33 (3.96 in decimals is 0.0396). So from here, if you make a monthly payment of $100, $67 of it will go to lowering the $9,000, while the other $33 will go to interest (Rosenberg, Student Loan Hero).

When Payments Begin

After learning all there is to know about your loans it is time to begin attacking them head on and start paying them off. Begin by paying off the loans with the highest interest rate first. Another strategy you can utilize is to pay extra money on a loan whenever you can. The faster you can reduce the principal or sum of money borrowed/owed, the less interest you will have pay on the loan. Less principal means you will have a lower interest payment.

If you have a federal student loan, you may have the ability to work out an alternative repayment plan, but know that they are not applicable on any private student loans:

  • Graduated: If your current income isn’t the greatest, but your future one is looking to be bright, this may be the plan for you. Graduated repayment plans last 10 years and have low payments early on, to work well with entry level salaries and increases every two years over the loan term. This plan typically costs a tad more than the standard plan, but will be a convenient route if your career is on track and you expect to get raises or move on to higher paying jobs in the decade of the loan plan.

  • Standard: With this plan you must make fixed payment of a minimum of $50 a month for a certain period of time, but no more than 10 years. This plan will most likely allow you to pay your loan back the fastest and cost you the least, as long as you have the money to make your payments. If your monthly payments are more than 8% to 10% of your gross income per month, then you may want to go with a more flexible and longer alternative payment plan.

  • Extended: Lasting longer than the graduated and standard plan; the extended repayment plan lasts 25 years, meaning a lower monthly payment for you. However, while you may have lower monthly payments than a standard or graduated plan, the extended will end up costing you more overall. This is because you will end up paying interest for a longer time, interest being the amount it costs to borrow money or what you pay a lender for supplying you with a loan.

  • Income Based: This method bases your payments on your income and family size, limiting annual payments, for up to 25 years. After the 25 years, you may be allowed to cancel the remaining balance or have any debt on your balance be forgiven.

  • Income Contingent: This plan bases your payments on your Adjusted Gross Income (AGI) or your income after taxes and deductions, limiting annual payments to no more than 20% of your income for up to 25 years. Basically, what you end up paying each year will depend on what you make and there is no minimum payment. Any loan amount that is left unpaid after 25 years will be forgiven, but you may have to pay taxes on whatever you do not pay.

  • Pay as you earn: Lasting up to 20 years, “pay as you earn” will put a cap on your monthly payments at 10% of your monthly income, as long as you can show financial hardship. The criteria is not easy to meet, but if you qualify for the plan, you can continue to make payments even if you are no longer experiencing financial hardship.

Another option you have when you begin to make payments on student loans and you are not yet employed is to ask your lender to defer payments. If you qualify for deferment under a federal student loan, the federal government may pay the interest you owe for the duration of the deferment period. If you happen to not qualify for deferment, than you can ask for forbearance, giving you the opportunity to stop paying the loan for a set period of time. Any interest that you owe during the forbearance period will be added to the principal of the loan.

In rare cases you may be able to qualify for loan forgiveness or the cancelation of your student loan. These rare cases include events like your school closing before you finish your degree, you become disabled, or paying off your loans will drive you into bankruptcy. However, there are some cases that are not as rare or drastic that could lead to loan forgiveness, such as working as a teacher or as another public service professional (Epstein, Investopedia).

Whatever the case may be, as long as you pay off your student loans you will begin to erase your debt and build good credit. If you have any questions or would like more information on preparing to pay off student loans don’t hesitate to contact us. We are here to help you out and charge into the battle against student loans with you!