In 2007, Congress legislated a five-year drop in the federal student loan rate from 6.8% to 3.4%, with renewal scheduled for 2012. While last minute legislative action extended the lower rates until July 1st of this year, Congress failed to take up renewal before leaving for vacation. With interest rates appearing to double overnight, Americans are scrambling for ways to pay down student loan debts as quickly as possible.
If you have outstanding student loans, don’t panic. You’re not alone – plenty of your colleagues and former classmates are in the exact same position. Paying them down may not be easy, but it is possible. Comparing notes across our networks, we’ve come up with a set of best practice guidelines for getting out from under your student loans.
Throwing out those envelopes unopened will not make your loans go away. Keeping on top of the situation and maintaining a relationship with your lender gives you the clearest understanding of your options.
- Maintain an index entry for each loan, tracking its originating agency, status, and balance. Federal loan and grant information is retrievable online through the National Student Loan Data System, if you’re building your index from scratch. If you don’t have paperwork on hand from private loans you’ve secured, reach out to your alma mater. If they’re not able to locate the information themselves, they can usually set you on the right track.
- Select the optimal repayment schedule for your situation. Federal loans, for example, default to a ten-year schedule; if your field offers low starting salaries or your cost of living is high, this could prove onerous. Private lenders vary, but you can often alter in-progress repayment schedules for federal loans. These also come with a number of forgiveness and payment options you could be unaware of, such as income-based repayment, public service loan forgiveness or even automatic debt forgiveness after a specified interval of on-time payments. Do your research, reach out to your lender, and ensure your debt payment schedule is appropriate.
- If you’ve recently graduated, keep very careful track of your “grace period”. Most loans are built with a set interval between graduation and the beginning of your payment cycle. This interval can be pegged anywhere from zero to nine months, but is occasionally longer. However works for you, make certain you remember exactly when your payment schedule begins. Missing the first payment sets you on the wrong foot with lenders and can quickly become overwhelming.
4 Student Loan Payment Strategies
Don’t just throw money at the problem. You can realize strategic financial gains by choosing which loans to pay down first and how to structure your debt.
1. Target high-interest loans first.
Don’t be distracted by the principal balance of your loans; your total cost over the lifetime of each loan is often more a function of interest than total principal. Private loans are typically high-value targets, so start by ranking them according to interest. These loans, in order, are your primary targets. Federal loans are secondary targets, as they feature lower interest rates, more flexible payment schedules, and debt forgiveness options.
2. Pay down the principal of your primary targets.
Budget yourself in order to pay a fixed percentage over your required monthly payment whenever possible. Your interest payments are calculated each billing cycle based on the outstanding principal amount, so any time you can alter this formula is a good time. Don’t forget to include – with every payment – a written request to your lender that these extra funds be applied to the principal. Most lenders, feigning innocence, will default to crediting any overpayment towards the next month’s billing cycle. Track your principal across each payment and ensure they don’t accidentally overlook your written request, following up immediately should a discrepancy arise.
3. Consider consolidating your primary targets.
This doesn’t always work out to your advantage, but might depending on circumstance. Loan consolidation involves contracting with a single agency to buy two or more of your outstanding loans, bundling them into a new loan with its own payment structure. This is convenient, as you’ve only the single payment to make each month and one lender to track, and can even work out mathematically to lower your lifetime interest amount. Do the math carefully, select a lender offering fixed or low interest rates, and read all the fine print. If you find the right lender, you can eliminate several high-interest loans at a stroke, for significant lifetime savings.
4. Never consolidate federal loans through a private lender. Ever.
Loan consolidation companies are private lenders, under no obligation to honor forgiveness programs, flexible payment structures, or borrower protections that come with many federal student loans. The math might be tempting, but this is never a good idea. If you want to consolidate federal loans, use the government’s Direct Loan program, instead. You can realize the same strategic advantage as consolidating through a private lender while retaining the tactical options offered by federal student loan programs.
You’re an Engineer. You Can Handle This.
Don’t be intimidated by financial instruments, debt, or onerous payments. Money is a number, payment schedules are equations, and math is very much what you do. By studying your outstanding loans, ranking them into primary and secondary targets, and practicing strategic consolidation, you can bring student debt under control, fast.
How did you squash your student debt? Help your fellow engineers out by sharing your student loan best practices in the comments, or tweet the @EngineerJobs.