If you’re like me, or one of the millions of Americans who have student loan debt, I understand your plight. Learning about the different servicers, figuring out the repayment plans, and familiarizing yourself with terms like “refinance” and “consolidation” can be a bit daunting. Although many young professionals may have already come up with a plan to tackle their student loans, there can be a bit of a learning curve for new graduates. Here are some simple steps to help you tackle your student loan debt:
Step 1 = Figure out how much student loan debt you have. If you filled out a FAFSA form and received student loans from the federal government, then you can go to https://studentaid.ed.gov/sa/ to see your total student loan debt balance. You will need to input your FSA username and password in order to login (this is the same username and password you used to fill out your FAFSA form). Keep in mind, the total amount of student loan debt you have will include the principal (how much you actually borrowed) and the interest (the amount the government charges you each year until you pay the money back). If you took out private loans from outside banks, foundations, or corporations you will need to contact them directly (if they haven’t already started contacting you first) to determine how much you owe.
Step 2 = Find out the interest rates and the servicers of each loan you have. When you took out a student loan from the government, it was issued by the Federal Department of Education. However, there are different sub-departments within the Department of Education that handle your loan repayment. These “sub-departments” are called loan servicers and they are who you actually contact when you repay your student loans.
For example, I took out loans through the Federal Department of Education, but my loan servicer is Nelnet. Thus, Nelnet is who I pay when my loan is due. You might have taken out a loan through the Department of Education just like me, but have a different servicer (such as Great Lakes, FedLoans, Navient formerly known as Sallie Mae, etc). You must pay back your particular loan servicer directly. Once you login into the website and find out the servicer each of your student loans, you need to look at the interest rates on these loans. Chances are that you have different interest rates on each loan since the interest rate may have fluctuated as you took out loans from year to year. Your goal is to determine the range of interest rates you have on your student loans.
I know this may sound complicated, but it’s quite easy. I’ll walk you through what it was like for me. As soon as I logged into the website I had to accept a waiver. Then, I was able to see the total amount of student debt I owed (which was pretty high given my status as a medical student, but I digress). Anyway, I could also see the number of loans I had taken out and the fact that all of my loans had the same servicer (Nelnet). You may have different servicers for different loans, so be careful. Once I saw this listing of my student loans, I could then expand the tab (by clicking an arrow) and see the amount of each loan, the interest rate on each loan, and the date on which my next payment on that loan was due. If I click “view details” I can see the date on which I took out the loan and the interest that has accrued on it up to this point, among other things.
Step 3 = Understand the pros and cons of student loan debt consolidation. Debt consolidation is when you combine all of your loans into one giant loan with one interest rate. Consolidating your loans has advantages and disadvantages. The advantages of consolidating your loans (through the federal government) is that you combine all of your loans into one giant loan. Your new interest rate will be the weighted average of the interest rate on all of your loans. If you do not consolidate then you will have a different loan for each semester in which you took out money, each with different interest rates and potentially different loan servicers. This can get confusing.
By consolidating (through the federal government) you are able to combine all of these loans into one loan and focus on paying that one loan only. Having one giant loan, instead of many different smaller loans, tends to look better on your credit report. Another advantage of federal consolidation is that any loan that may not have counted towards loan forgiveness programs can now count towards those programs after you consolidate your loans (through the federal government).
The disadvantage of consolidating your loans is that any interest that has accrued on your loans will be added to the principal amount. Let me explain. If you took out unsubsidized loans, then interest accrued on those loans while you were still in school. Once you consolidate your loans, all of the interest that has accrued on your loans to that point will be added to the principal amount of the loan. For example, if you have taken out a total of $50,000 in student loans and $3,000 in interest has accumulated on the loans during that time, then if you consolidate your loans you will have a new loan with a new principal amount of $53,000 (that includes the $50,000 you borrowed plus the $3,000 that had already accumulated in interest).
I should mention that you have the option to consolidate your loans through the federal government or through a private company or bank. Although a private company may be able to offer incentives to get you to consolidate through them, I would advise you to consider consolidating through the federal government instead, if you choose to consolidate in the first place. The advantage of consolidating your student loans through the federal government is that you are still eligible for many of the benefits that come with federal student loans.
The federal government is much more understanding when you go through life changing situations. If you lose your job, become disabled, or have some life altering event that prevents you from making your student loan payment you can ask the government to put your loans into deferment or forbearance. Although they are slightly different, both of these options will grant you temporary relief from having to pay back your loans for a few months up to a few years. Most private companies will not give you this option.
Plus, many federal loans can usually be “forgiven” after a certain length of time. In fact, many federal income-driven repayment plans and programs will forgive your loans after 10-25 years. So unless you are secure in your job and are making a lot of money, I’d suggest consolidating your loans into one giant loan with the federal government if you feel you need to consolidate at all. Doing so, allows you to keep the protections that come with federal loans and makes your student loans easier to manage in the process.
What am I doing? Consolidating. Even though my loans are already with the same loan servicer (Nelnet) with fixed interest rates, I need to consolidate in order to waive my grace period and start making payments under Public Service Loan Forgiveness as soon as I can. Graduates have a 6 month grace period before they have to start paying back their loans. While most graduates appreciate this grace period, I plan to opt for Public Service Loan Forgiveness (PSLF). Under PSLF, I'll be enrolled in an income-driven repayment plan that caps my repayment at 10% of my income until my loans are forgiven. However, PSLF doesn't kick in until after the grace periods ends. If I wait 6 months for the grace period to end, I will miss out on 6 months of low payments that could count towards PSLF. In order to waive the grace period, I must consolidate.
My point? If you have multiple loan servicers, variable rate loans, loans that don’t automatically qualify you for a loan forgiveness programs, or plans to pursue PSLF specifically, then consolidating through the federal government may be beneficial for you as well.
Step 4 = Think twice before you refinance your loans. Although refinancing can be similar to consolidating, the terms are different. Consolidating your loans is when you combine all of your loans into one giant loan and the interest rate you pay is the average of the interest rate you had on each individual loan. Refinancing is different. Refinancing is when you combine all of your loans into one giant loan and pay a LOWER interest rate than what would have been the average on all the loans. Refinancing can only be done outside of the federal government through a commercial bank, credit union, or some outside company.
The advantage of refinancing is that you pay a lower interest rate than you would have otherwise which can save you thousands of dollars. The disadvantage of refinancing is that you lose the protections and benefits that come with having federal loans. After you refinance, you are no longer eligible for federal deferment or forbearance if life takes a turn. Most importantly, you are no longer eligible for federal student loan forgiveness programs. Unless you are certain that you will not be pursuing any student loan forgiveness programs and have enough job security that needing deferment or forbearance is unlikely, then you may want to wait to refinance.
What am I doing? Choosing not to refinance right now and revisiting the subject in a few years. As a graduating medical student who will start residency training as a physician, I am in a unique situation. My plan is to enroll into an income driven repayment plan through the federal government. I will pay my student loans on time each month until I finish residency training and fellowship. Afterwards, I will decide to work in academics or private practice. If I choose academics I will keep my loans with the federal government and opt for public service loan forgiveness (which forgives my loans within 10 years). If I do not choose to work in academics, I will refinance my loans with a private company and plan to pay them off in 5 years.
Step 5 = Enroll into a repayment plan that is best for you. There are many different repayment plans. You need to check with your loan servicer to see which repayment plan options you qualify for or use the repayment estimator to get a general idea. If you don’t choose a plan, you will be automatically enrolled in the standard repayment plan which puts you on track to pay off your loans within 10 years. Although this plan will save you money in interest payments, the monthly payment required may be higher than you can afford.
If this is the case, enroll in one of the income-driven repayment plans. These plans never require you to pay more than 10% of your income in students loans and will forgive your loans after 20-25 years, if you haven’t already paid them off. (If you opt for public service loan forgiveness, then your loans will be forgiven in 10 years). Income driven repayment plans are ideal for anyone who plans to get their loans forgiven via public service loan forgiveness or some other type of loan forgiveness program.
Step 6 = Look into loan forgiveness programs and submit the necessary paperwork. I alluded to this above, but as you think about your student loans it’s important to consider whether or not you are considering some sort of loan forgiveness program, most notably public service loan forgiveness. Although this program will forgive your loans after making 10 years of payments, you need to ensure that you have properly enrolled into it.
You can refer to the student loan website but essentially you need to have direct loans through the federal government, work at some sort of academic institution or non profit organization, and make 10 years of on-time qualifying payments. If you know you want to enroll in this program, then you can fill out the form on the student loan website. You complete sections 1 and 2, have your employer fill out sections 3 and 4, then fax the completed form to the “Fedloans” sub-department of the federal government to officially enroll.
To summarize: there are 6 steps you need to take to start tackling your student loans. First, go to the student loan website and figure out how much money you owe. Then, determine your loan servicer and the interest rate on each of your loans so you can figure out who to contact to start repaying them. Next, you need to understand the pros and cons of federal debt consolidation so you can figure out if you should combine your loans into one giant loan or not. Remember to think twice before you refinance your loans since doing so will make you ineligible for federal loan forgiveness programs. After that, enroll into an income-driven repayment plan, if your monthly payments under the standard plan are higher than you can afford. Lastly, look into government loan forgiveness programs and submit the necessary paperwork to enroll.
Tell me, was this helpful? Do you feel more like you have a game plan on how to tackle your student loans?