No matter what happens with the tax cut bill before Congress, which would eliminate the deduction for student loan interest, most 2017 college graduates have to start repaying their loans this month or next. That’s when the six-month grace period after graduation ends.
Though it sounds simple, student loan repayment can be complicated, and not just because of the inexperience of the borrower. Here are some tips for graduates and their families gathered from Sallie Mae, a private lender which until 2014 serviced federal student loans, and Mark Kantrowitz, a financial aid expert.
1. Get organized. Graduates should gather any billing statements they have received from their loan servicer or lender and make a list of all their student loans, including the lender’s or servicer’s name, loan amount, payment amount, payment due date and payment address. They can check StudentLoans.gov for a list of all their federal student loans and AnnualCreditReport.com for a list of their private debt.
Sallie Mae suggests a spreadsheet for all this, including also the home number of the lender or servicer, loan interest rate and whether it’s fixed or variable.
2. Build a budget to figure out an affordable monthly payment — Sallie Mae offers a monthly budget worksheet but there are many similar apps to be found online.
3. Set up a repayment plan that’s affordable. For most borrowers the standard repayment has the highest monthly payment and will be paid off the quickest, saving the borrower the most money over the life of the loan, says Kantrowitz. Extended repayment and income-driven payment offer the lowest monthly payments but will cost borrowers more over the long run. Kantrowitz advises borrowers to choose a repayment plan with the highest monthly payment they can afford. Repayment calculators at the Federal Student Aid website, Sallie Mae website or other websites can help them figure out that payment level.
4. Sign up for automatic payments, whereby payments are transferred directly from a bank account to the lender or servicer. This helps borrowers avoid late payment fees and could save them money as well. Sallie Mae offers a 0.25% discount on auto-debit payments; other lenders discounts up to 0.50% savings, according to Kantrowitz.
5. Claim the student loan interest deduction on the federal income tax filing if available. Under current law the deduction is available for individual borrowers but phased out at incomes between $65,000 and $80,000; it’s phased out for married couples filing jointly with income between $130,000 and $160,000. The House tax bill, however, eliminates the deduction for all borrowers; the Senate tax bill makes no changes in the current law.
6. Accelerate repayment on the highest rate loans, making extra payments on principal, advises Kantrowitz. He recommends that borrowers specify the ID number of the loan to receive the additional payment and include instructions that the extra payment is for principal, not interest.
7. Don’t assume that consolidating loans will save money. Consolidation of student loans can have unintended consequences that could cost borrowers in the long run. Consolidating federal student loans, for example, prevents borrowers from targeting the highest rate loan for quicker repayment, says Kantrowitz. Consolidating private loans can save money but only if the new interest rate is lower than the weighted combined rate of the individual private loans. It could takea borrower several years of on-time payments to qualify for a lower rate, according to Kantrowitz.
Most important, consolidating loans can have prevent borrowers from qualifying for public service loan forgiveness, income-based repayment, or Pay as You Earn programs (including the revised version, REPAYE). A borrower who consolidates federal loans into a private consolidation loan, for example, loses all of the benefits associated with federal loans listed above, says Kantrowitz. Borrowers need to know the potential pitfalls before consolidating student loans.
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