By Ted Chan, MBA
Once you graduate from college, you will be expected to start repaying your student loans. Young people's entry into the professional world is increasingly accompanied by huge student loan debt. This can be daunting. The silver lining is that if you understand the tricks of the trade and plan your finances accordingly, you can get rid of your loans within a few years or at least on time with no default or extra charges. Here is what you should know about paying off student loans:
Make a decision about your repayment plans
More often than not, you will have two options to choose from. In the first scenario, you can pay off your loan aggressively i.e. you can make higher and more frequent payments. By doing so, you will reduce your long-term debt and you will end up paying less in the form of interest. On the flip side, if you start devoting a major part of your salary to student loan repayment, you won't be able to make any substantial savings for your immediate future. Or worse, you might not have any cash to fall back on in case of a financial emergency. On the other hand, you could choose a repayment plan with low monthly payments. This way, you could save money for future investments like buying a car or a house. However, the interest would accumulate on your student loan and you will pay more money overall and over a longer period of time. There is the argument to be made that a graduate starts working at a basic salary, which will hopefully increase as his or her career progresses. Therefore, even if the loan payments are higher during later stages, you can easily afford them. Ultimately, the choice depends on your personal preferences. Some people like to get rid of the loans as soon as possible even if the monthly payments cut into their salaries while others don't mind paying more, but when they can actually afford it.
Choose your federal aid repayment plan
If you received federal aid in the form of Stafford Loans, Perkins Loans, or PLUS Loans, you can choose from a variety of repayment plans. Under the standard repayment plan, you will be paying a minimum sum of $50 every month for 10 years. Alternatively, if you are looking for a plan with lower payments in the initial stages, you can consider the graduated repayment plan. The monthly payments start as low as $25, last for 12 to 30 years and will increase progressively. Additionally, you can choose the extended payment plan for larger debts or the income-based plan, under which federal authorities will deduct a reasonable percentage of your salary every month for 25 years.
Manage your money wisely
At times, graduates can get a little reckless with their money in the wake of their newfound financial independence. If this ever happens, you must remind yourself of the debt hanging over your shoulders. If you can restrict your expenses for a few years, you can get rid of the burden once and for all. Not only will it come as a huge relief, it will also allow you to make other life-changing financial investments.
What if you can't repay your student loans?
Considering the debilitating state of the economy, there is a fair chance that you might not find a job that pays well. Alternatively, you might be unemployed or go back to college or graduate school for further studies. In such situations, you can apply for a possible deferment of loans i.e. you can postpone the repayment of loans for a particular period of time. Ultimately, you will have to repay your loans. Remember that defaulting on your student loan can have severe repercussions - the US Department of Education can garnish your wages, offset your tax returns, take away federal benefits or even sue you legally. If you ever default on your federal student loan, contact your loan servicer right away. You can also contact the collection agency which has been given charge of your particular loan. Quite obviously, defaulting on your student loan is a serious matter which can turn into a pretty nasty situation. To prevent this from happening, make the right financial choices and start planning well in advance. Good luck!