How to start paying student loans – best practices guide

[This is the first installment in a series examining repaying student loans. Part II will discuss an alternative payment plan, Revised Pay As You Earn or REPAYE.]

As someone who started off her debt reduction journey on Get Rich Slowly with some pretty astronomical student loan debt, I've learned the hard way about the repayment process. And with school starting up again and many feeling tempted to borrow, I wanted to share some of that retrospectively gained wisdom.

A staggering number of college grads start their careers with student loan debt, and many of them struggle to get ahead as a result.

But whether you're just starting your college journey or you're a recent graduate with monthly payments looming on the horizon, here's what you need to know about how to start your student loan repayment off right.

Reduce your overall debt

If you've already graduated, there's no way to go back in time and borrow less money. But, if you're still in school, then this is the tip to take to heart: Don't borrow more than you need while in school. The less you borrow as an undergraduate, the less you'll have to pay back later.


If you're contemplating a graduate degree, read how to minimize your grad school debt.


Yes, a new computer, a car, travel, and other aspects of lifestyle inflation may be calling you, especially when the money's so easy to come by. However, living frugally while you're a student means being able to use more of your hard-earned money later, whether it's to build your savings account to buy a house or meet other financial goals. Don't put yourself in a situation where you'll be a slave to your former lifestyle.

Know how much you owe

Since borrowing happens incrementally over several years, all too many graduates have no idea how much they owe. Additionally, since the originator of your loan (who cut you the check) may not be the same entity as the servicer (who you make payments to), and since servicers can sell loans to other servicers, knowing who you owe how much to can be tricky.

Here's how to find out how much you owe
Enter the Department of Education's National Student Loan Data System (NSLDS). This system will tell you about Title IV loans and grants that you were awarded.

If you acquired non-Title IV loans (i.e., private loans), they may not be listed on the site, so make sure you track those down as well. Servicers will find you if you don't find them, but you don't want things to get to that point! Plus, having all the information at your fingertips can help you plan your repayment strategy.

Pick a repayment plan

The default repayment plan is the standard plan, in which you have a fixed payment, or in other words, you pay the same amount each month for 10 years. However, other plans are available, and something else may be a better fit for your circumstances. Repayment plans for federal loans also include:

  • Graduated repayment plans, in which monthly payments start out small and gradually increase over the repayment term. You'll pay more in interest but have lower monthly obligations when you're just starting out (and earning less money than you probably will later, after your career progresses).

  • Extended repayment plans, which can be fixed or graduated in terms of monthly payment and which extend the repayment term from 10 to 25 years. This option also increases the amount you'll pay in interest.

  • Income-based repayment, or IBR, which extends the repayment term and caps your monthly payment at 15 percent of your discretionary income if you meet the eligibility criteria. While any remaining balance at the end of the repayment term will be forgiven, it will be taxed as income.

  • Pay as you earn, or PAYE, which is similar to IBR except the cap is 10 percent of your discretionary income. There are additional eligibility criteria.

  • Income-contingent and income-sensitive plans that are similar to IBR and PAYE but with slightly different eligibility criteria and repayment formulas.

Confused? The Federal Student Aid repayment estimator can help you determine eligibility and projected monthly payments before you contact your servicer to ask to be put on a plan.

One thing that's important to remember is that you can switch payment plans if you need to. Also, I believe that once you qualify for an income-driven plan, you can't be kicked off and your monthly payments will never be more than they would be under the standard plan. So if you qualify, it may be a good idea to get on one of those plans before you're making too much to meet the criteria.

Decide whether to consolidate at all — and if so, which loans to include

Federal loans can be consolidated into a Direct Consolidation Loan or a private consolidation loan. Private loans can only be consolidated into private consolidation loans.

Tip: If you are consolidating, you don't need to include every loan. It is almost always a bad idea to consolidate a federal loan into a private loan, since federal loans come with benefits that are lost if they “turn into” private loans. Those benefits include clear policies on deferment and forbearance, fixed interest rates, and income-driven repayment plans.

Beyond that, it's worth mentioning that consolidating loans generally results in an interest rate that is the weighted average of the consolidated loans (usually the average interest rate of all the loans plus 0.25 percent). While having fewer payments a month decreases the likelihood that you'll miss one by accident, you will pay more for the privilege.

Make payments on time, every time

This goes for any bill or debt, obviously. However, not paying student loan debt can have some pretty nasty consequences. Not only is student loan debt not dischargeable in bankruptcy; if you don't pay, then your federal income tax returns or even your wages can be garnished.

Automating your monthly payments can help you avoid these consequences, and most servicers will give you a modest (~0.25 percent) interest rate reduction for setting it up. Just make sure there is always enough money in your bank account to cover the bill.

What to do if you can't make payments

This cannot be emphasized enough: If you're having trouble making your payments, tell your servicer. Don't stick your head in the sand. You don't want to let things progress to the point where your tax returns or wages are being garnished and/or your credit is ruined.

Be proactive.
You may qualify for a deferral or forbearance, or your servicer may have other hardship options not advertised on their website. You'll never know if you don't ask. Again, since student loan debt isn't dischargeable in bankruptcy, ignoring the problem won't make it go away.

If you feel that you are being mistreated or given the runaround by your servicer, consider submitting a complaint to the Consumer Financial Protection Bureau (CFPB), a federal agency that will work with you and your servicer to address the issue.

Final thoughts

Maybe #StudenLoanDebt is trending, but believe me, you want it to be a thing of the past as soon as possible!

What advice would you give to someone as they start repaying their student loans?

More about...Budgeting, Debt

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Beth
Beth
4 years ago

Good advice! But for me, it’s missing a step. The first thing I did was think about my debt repayment philosophy or approach. Some of my classmates didn’t think debt was a big deal and were okay with paying their loans back over 10-12 years. Others felt their debt was a huge burden and wanted to get rid of theirs as soon as possible. I was somewhere in between. I hate debt, but I didn’t go all-in repayment mode because I wanted to start saving for retirement and build an emergency fund. Needless to say I did without a lot… Read more »

Another Beth
Another Beth
4 years ago
Reply to  Beth

As usual, Beth has great advice!

In addition to finding the right repayment plan, I would add creating a plan whenever one receives a windfall (bonus, unexpected inheritance, etc.). While it’s never a bad idea to make a plan as to what to do with extra money, it’s especially useful when you’re just out of college and perhaps aren’t quite used to financial responsibilities.

Tay
Tay
4 years ago

I would also add instead of making one monthly payment, it helps with the interest to make bi-weekly or even weekly payments.

I take my monthly payment and I break it into 4 payments to pay each week. I’ve compared the amount I’ve paid off over 12 months since I started weekly payments and it is $2000 more than I did in previous 12 month periods when I was just making 1 monthly payment.

Note: Find out if your lender applies payments immediately. If your lender waits until the entire payment is there, this will not be beneficial to you.

Michelle
Michelle
4 years ago

My top tip would be to find extra money to throw towards your loans! Either find ways to cut your budget or find ways to increase your income. Or, do both! I managed to pay off my student loans from my 3 degrees quickly and it’s something I will never regret.

Chuckie G.
Chuckie G.
4 years ago

This post contains great advice on doing the math; the hard side of the equation. My advice is to take doing the math one step further and give adequate and thoughtful consideration to how it will feel to service the debt, the soft side of the equation, and act accordingly. I understood, mathematically, what it would take to repay my student loans when I signed up. I was gosh darn lucky in that my calculations in terms of what I was borrowing and my ability to repay, proved to be more or less spot-on. Where I failed was in understanding… Read more »

Syed
Syed
4 years ago

Great overall advice here. If everyone with student loan debt learned the info in this article, we wouldn’t be in the mess we’re in today.

For people with student loan interest rates anywhere over 5%, it’s a good idea to look into refinancing. There are lots of good tech companies that help with this such as Earnest and Sofi. You can easily get a 6% loan down to 3%, and their customer service is a lot better than big banks.

Danielle
Danielle
4 years ago

Knowing that I wanted to work for a few years in between undergrad and grad school, I wish I had saved more money. I wouldn’t have been able to save enough for two years of tuition and living expenses, but I could have put away a couple thousand dollars to cover books, supplies, software, etc. Instead, I blew my money on frivolous throw-away purchases and when I started to grad school, I had to fund everything via loans at 5-8%. I would also echo Honey’s advice and not take out more than you think you need. If worst comes to… Read more »

Erin
Erin
4 years ago

I’d add to not just know how much you’re starting with, but really keep track of the balance over time. I used a spreadsheet to track my balances, and loved seeing how much an extra payment would save me, how much quicker it would get the thing done. It became a little addicting, and really encouraged me to kick extra money towards the loans whenever possible. I’m sure there are plenty to choose from out there, but the spreadsheet template I used was: https://drive.google.com/previewtemplate?id=0Ak7JTr_5ZgQBdEhKSmRDNGdjY3Ezc3libU1qSE1DMWc&mode=public&ddrp=1#

Jess
Jess
4 years ago

I second the method of paying biweekly! You pay an “extra” one-month payment every year, reducing the overall repayment time, even if you only pay half the minimum payment every two weeks. I started paying off my loans as soon as they came due (why I didn’t start as soon as I graduated, I guess I don’t know), and rounded up to the nearest $100 to kick-start that project, paying monthly. As the balance went down (multiple loans, though I unfortunately (or fortunately?) have no idea what the original balance was), I kept paying the original minimum to keep/increase momentum.… Read more »

Andrew
Andrew
4 years ago

Fine article, but it is missing one MAJOR aspect. Get a Job throughout college. Each and every year you should be working to make payments on your debt as you go. Doing this will significantly decrease your debt burden when you graduate. 6-8% interest on these student loans is no joke, especially in an environment when you earn almost nothing putting money in a savings account. You are doing your future self a disservice if you are not working and making payments on these loans all throughout school. Also please pick a major that is going to pay you back!… Read more »

Laura
Laura
4 years ago
Reply to  Andrew

I would note a caveat: while in college, evaluate the time and effort studies take with the time and effort a job will take. There’s a big difference between a work-study job where you sit at a desk and do homework while waiting for the occasional visitor to ask a question vs. a job that runs you ragged and subtly makes clear that handling those duties should come before your education. You’re not saving money if you have to go to school for 5 years instead of 4 because you had to work too much to study well. That said,… Read more »

tas
tas
4 years ago

this sounds silly, but it was a big realization for me: pay your bill when you get paid, not when it’s due. i routinely pay the bill 3-5 weeks ahead of time because of this. sounds like a little, but even $10/extra a month can shave off months from your overall timeline. this is pretty much the same advice as paying bi-weekly, but it’s practical for those of us who are paid once a month. unfortunately, the loan companies (esp navient) don’t make this easy. navient won’t show me my minimum payments unless I’m less than a month away from… Read more »

Jess
Jess
4 years ago
Reply to  tas

I hear you on the Navient issues! Even when they were Sallie Mae I never knew what my minimum payment was – I always assumed it was because I was ahead of schedule on my payments. (My account currently says “no payment due at this time” or something similar.) I have to call and navigate through a half dozen menus before I can get to a real person to ask! It drives my husband bonkers that I don’t know the minimum payment… all I know is that it’s less than half of what I am actually paying!

tas
tas
4 years ago
Reply to  Jess

Jess,

Their system is clunky, but you can find minimum payments by clicking on the loan number (yes, the loan number that doesn’t really look clickable). That brings up more information, including how much interest has accrued since your last payment and the required minimum payment.

Robert
Robert
4 years ago

Is impossible to use this “tips” in Poland.

sarah
sarah
4 years ago

Another option is to look for jobs that offer loan repayment assistance as a benefit. If you are willing to relocate to a rural area and/or work for a lower salary, there are some options out there. A friend who worked for a non-profit legal services organization in a small town had 20% of his law school loan repaid for each year he worked there. I have heard that there are many opportunities for loan repayment in rural health care also and they are not limited to MD’s. A plus is the cost of living is usually lower in rural… Read more »

ikomrad
ikomrad
4 years ago

I tried using the preset payment plans, and I made no progress in 10 years. I actually owed more than when I started! After I switched to the Total Money Makeover plan, I cut expenses, increased my income, and threw every spare cent at my loans. I was done in 2 years.

College Webster
College Webster
4 years ago

nationwide, we have experienced a corporatization of postsecondary education that needs to be addressed. While colleges and universities advetize the concept of maintaining high standards and administrators vehemently deny efforts to lower standards, they use a back-door method of doing so. Faculty evaluations in some cases and simply “corporate” culture in others press faculty to both fill courses quickly and retain students. The real danger in the fact that the nationwide grade average is now a B moving toward an A is not that B students are given an A. It is that F students are given a C. As… Read more »

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