A lot of us have student debt. Like over “44 million of us” a lot. Americans owe 1.3 trillion dollars in student loans. What does that mean for you? Well, if you’re looking to take money out for college or already have and will begin paying it off soon, it’s important to understand just how these student loan payments work and how to get them under control. With tuition, debt and interest rates so high recently, you can’t afford not to.
Student Loans: The Basics
College isn’t cheap, and it gets more expensive by the year. Paying your way through college by working is less and less viable. Therefore, many Americans have to take out loans from banks or specialized lenders to pay for college or university and pay it back over a longer period of time.
The good news is, you usually don’t have to start paying it back immediately if you don’t want to. But eventually, you are going to have to pay the money back, most often on a monthly basis. You’ll make student loan payments every month for a period of time determined by you.
Sometimes, you agree how long you will be paying when you take out the loan. For example, you could promise to pay back the loan in 5 years or 20 years. The extra time may seem nice, but higher interest rates and being in debt longer can negatively impact your finances. You can always pay back your loans early, however, if you have the money.
Probably the most complicated and frustrating part of student loan payments is our interest. Money lenders don’t let you borrow money out of the goodness of their hearts. Student loans are a business like any other. That is to say, they are in the business of making money. They accomplish this by charging you interest.
You will eventually pay your lender back more money than you borrowed from them. Just how much is determined by your interest rate. This rate, calculated as APR, is a percentage of the total amount of your debt that the debt will increase by, every year. For example, if your loan was $100 with a 10 percent APR, you would owe $110 by year’s end if you made no payments on it.
Average interest rates can be anywhere from two percent to eight percent or more. This may not seem like much, but it definitely is. With the price of tuition these days, even small percentages amount to significant sums. Additionally, interest compounds. This means that the $110 dollars you owed from the example will next year be 121 dollars by the end of the next year because the interest rate is for the current debt, not the original debt.
With all the interest flying around and compounding, you can find yourself deep in debt making significant student loan payments every month. The average student loan payment per month is around 200$ a month. You might pay even less, as there are minimum required payments but they are quite low. Again, this seems surmountable, but considering the fact that you could be paying this amount for 20 years or more with compounding interest, it’s likely you will end up paying much more than your original debt.
Keeping Payments Manageable Before You Have to Make Them
So, you want to keep your payments manageable, but also want to make a significant dent in your debt every month. Luckily, there are ways that you can reduce your student loan payments before you make your first one. There are several choices available to you that can keep your interest down so that your payments go farther.
Choosing the Right Interest Rate
Don’t leap out at the lowest interest rate you see, not all are created equal. Find out first if it is a variable interest rate or fixed interest rate. Variable interest rates can change over time depending on the market and many other things, whereas fixed interest rates are locked in the moment you sign.
Interest rates tend to increase over time, but slowly. A short-term payment plan could benefit from a variable interest rate as it could go down while you are paying it. Fixed rates are generally better for long-term plans.
Choosing the Right Plan Length
Choosing the right payment plan depends on your life circumstances and available income. Shorter-term plans will always have higher minimum monthly payments but usually lower interest rates because the companies like to get their money back faster.
Longer term payment plans have lower monthly requirements but tend toward higher interest rates. It would be nice if everyone could choose a shorter plan, but choose realistically; failure to pay the debt back on time can have more serious consequences than a longer, slightly more expensive plan.
Know Before You Go: The Student Loan Payment Calculator
Making an informed decision on what plan, how long you pay and how much you borrow hinges on knowing what your monthly student loan payments will look like. To help you get a good sense of what you will be paying, many lenders and other services offer student loan payment calculators. These are software programs, often available for free on the internet, that can tell you how much you can expect to pay monthly.
After entering your details like how much you owe, your payment plan and your interest rate, the calculator will tell you how much you will need to pay every month to reach your target. If you want to see how much you would have to pay every month to eliminate the debt by an earlier date, simply enter that time into the calculator instead of the agreed upon time in your plan. To find the calculator for your lender, just go to their website. If you borrowed from Wells Fargo for example, you can use the Wells Fargo student loan payment calculator available on their webpage.
Reducing Student Loan Payments After You Already Have Loans
If your student loan payments become too much for you after you take the loan out, don’t panic. There are several ways to reduce your payments even if your plan is set and your interest rates are fixed. These methods may extend how long you are in debt, but at least you won’t be declaring bankruptcy or defaulting which can affect your credit in severe ways. Some things you can do include:
- Student Loan Consolidation: If you have multiple loans from different sources with various interest rates, it is possible for you to consolidate them into a single monthly payment with a lower interest rate. This will likely extend your payment plan by some years, but it will keep your head above water.
- Change to an Income-Driven Plan: If your monthly payments are too much to handle at your current income, you might qualify to switch to an income-driven plan. This fixes your payments based on how much you make instead of what your plan dictates. So, even if your monthly income drops, your payments will follow it down to keep pace and prevent you from getting wiped out.
- Change Your Due Date: If your due date is shortly before your payday, you may find that your finances are wiped out before you can make it to the due date. By changing your due date to shortly after your payday, you can make the payment immediately and not dread its approach or have to factor it into your spending. You can accomplish this by simply asking your lender to change the date, they should be accommodating.
- Deferment and Forbearance: Deferment or forbearance means that you drastically reduce your payments or put them on hold for a time, usually because you are unable to pay due to unforeseen circumstances such as unemployment. You will have some breathing room and some time to get a new job or increase your income to be able to pay. Beware, however, this isn’t always free. Some loans will allow you to do this, but they will continue to accrue interest, meaning your debt will continue to grow even if you don’t have to pay it.
Fighting for Your Finances
In a perfect world, you could pay more than the minimum payments and beat down your debt to stop interest from smothering you. You don’t want to be paying college up until you retire! If you can, always pay more to get debt free quicker.
Of course, that’s not always possible, life being what it is. Being prepared when applying for loans with knowledge will help you keep those payments down, but sometimes you get thrown a curveball. Taking steps to reduce your monthly student loan payments may result in slightly longer payment lengths or larger debt, but the alternative, defaulting, is worse.