Get ahead of the class: Prepare now for your first student loan payment

By Gina Gallagher | Citizens

Wait for it…

The degree you worked so hard to earn is about to pay off. That means a real career — and a real paycheck — may soon await you. There’s something else that awaits you, though, that’s not quite as exciting: your first student loan payment.

Yeah, that.

With everything going on at school, you may not even be thinking about it. Or maybe you’re thinking that those political promises of student loan forgiveness will make your loans magically disappear. The reality is, your first loan payment will be here before you know it, and you need to ensure you’re ready for it … now.

Here’s a list of some easy ways to stay ahead of the class on your student loan payments.

1. Know the terms of your loan. Literally.

An educated borrower is a wise borrower. That’s why it’s important to understand the loans you have and the terms that come along with them.

• Principal: The amount of money you have left to pay back on your loan, not including the interest you're charged.
• Interest rate: The fee (expressed as a percentage of the principal) the lender is charging you for borrowing.
• Repayment plan: The schedule and loan terms by which you’ll pay back your loan. For federal loans, you can choose how you want to repay (more on that below).
• Grace period: The amount of time you have after you graduate until you have to begin paying back your loan. For federal student loans and many private loans, you have a six-month grace period after you graduate.
• Lender: The institution that granted the loan. If you have a federal loan, it’s the federal government. If you have a private loan, it’s a bank, credit union, or other financial institution.
• Student loan servicer: The institution that will receive and process your payments.
• Party: What you’ll want to throw when you’ve paid off your loans in full.

2. Know what you owe

How well do you know your student loans? Do you know how many you have? Who they’re with? The interest rates and amounts? Now’s the time for answers. It’s possible that you have several loans with several different lenders. You may have federal loans with the government and loans with private lenders. If you have federal loans, you’re required to complete exit counseling before you graduate. Exit counseling will help you better understand how interest is calculated, explain your repayment options, and provide tips and strategies for ensuring you don’t default on your loans. You’ll also learn more about the loans you have and the servicer(s) assigned to your loans. Your servicer will most likely notify you prior to your first payment; however, it’s important to be proactive and understand where to send your payments. Another way you can find your servicer is by visiting the National Student Loan Data System.

You may also have loans with private lenders, such as banks and credit unions. Private lenders don't require that you participate in exit counseling. If you’re not sure what private loans you have, look on your credit report. You’re entitled to a free annual credit report. Once you have an idea of the loans you have, you’ll be better equipped for the next important step.

3. Choose a repayment plan

With federal loans, you have the option to choose the repayment plan that works for your budget. You can get more specific information about repayment options from the Federal Student Aid website. In general, the options include:

Standard repayment plan: With this option, which is available to all borrowers, you’ll make fixed monthly payments for a term of up to 10 years.

Graduated repayment plan: If your payments with standard repayment are too high, you might opt for graduated repayment. With this option, your payments start out lower and then gradually increase as your income increases, usually every two years. You have 10 years to pay off the loan, and this option is available to all student loan borrowers.

Extended repayment plan: If you have a tight budget and you’re seeking to lower your monthly payments even more, you can opt for extended repayment, which gives you up to 25 years to pay your loan back. Keep in mind, though, that this option will result with you having to pay more in interest over the life of the loan. Depending on the type of federal loan you have, some restrictions may apply.

Income-driven repayment options: If your payment amounts are too high relative to your income, you may be eligible for income-based repayment. There are four income-payment options: Revised Pay as You Earn Repayment Plan (REPAYE), Pay as Your Earn Repayment Plan (PAYE), Income Contingent Payment Repayment Plan (ICR), and Income-Based Repayment Plan (IBR), for which you could potentially qualify for depending on your income, loan type, and employment situation. Again, keep in mind that if you succeed in extending your term, you’ll end up paying more in interest over the life of your loan.

Though you may choose a particular repayment plan, you always have the option to pay more than you owe on your monthly payment. This would allow you to lower the amount of interest over the life of the loan and potentially pay your loan off sooner.

4. Create a budget

Once you know what you owe, you’ll need to make room for your loan in your budget. The concept of budgeting is probably not entirely new to you. In school, you may have had to forgo activities because you didn’t have the money to pay for them. Now, you’ll need to do that on a larger scale by creating a real budget. Failure to budget is one of the biggest reasons people of all ages get into financial trouble.

To create your budget, write down all the expenses you’ll have after you graduate. This would include things like student loan payments, rent, transportation costs, groceries, gym memberships, and subscription services.

Then, list your income. This would be what you’ll earn in your new job as well as any part-time jobs you have. You want to focus on your income after taxes. Once you determine that, subtract your expenses to determine the money you have left over. If your expenses exceed your income, you’ll need to cut costs somewhere — maybe by living at home with your parents for a while or cancelling a subscription or two. Or, to bring in extra income, you could create a side hustle.

If, by chance, you find you have excess money in your budget, you could start building an emergency fund — which could help you make your student loan payments or cover other expenses if you experience financial hardship.

5. Be ready to pay — on time

Once you know who you owe, as well as how much and when it’s due, it’s critical that you make your payments on time. Your payments will be made to your loan servicers. Once you know the name of the servicer, register on their website; it’s where you’ll find specific information about your loan, such as the payment start date and the amount of your monthly payment. You’ll also find instructions on how to make payments via mail or online.

Though your first payment has a grace period — usually six months for federal loans — it’s a smart idea to start saving now. If you have the money in your budget, you may even want to forgo the grace period and start paying your loan immediately. Remember, the sooner you start paying, the sooner you’ll be done.

One easy way to ensure your payments are on time is to sign up for automatic payments, whereby the payments are automatically deducted from your bank account each month. Many servicers will offer you a rate discount — up to .25% off — if you choose this option. Over the life of your loan, that discount in interest can save you a lot.

6. Get help if you’re experiencing difficulty

Paying your student loans on time is critical to building a strong credit history, which you’ll need to reach other goals in your life such as buying a new car or home. For that reason, it’s essential to stay on top of your payments. Becoming delinquent on your loans, particularly federal loans, could result in severe repercussions, including wage garnishment.

If you experience financial difficulty and can’t make your payments, make sure you contact your loan servicer immediately to review the options available to you. Your servicer may be able to offer a repayment plan that’s based on your income. The biggest mistake you can make is not doing anything.

7. Know the benefits and pitfalls of refinancing and consolidating

If you want to simplify your payments or even lower the amount you pay each month, you may be able to get relief by refinancing and consolidating your loans. When you refinance, you’re essentially using a private lender to combine and refinance your private student loans (student loans you have with financial institutions) and/or federal loans (loans you have with the government) to lower your interest rate. When you consolidate loans, you’re using a federal government loan to combine only your federal loans into one loan. Consolidating federal loans won’t necessarily lower your interest rate. Rather, it will combine your federal loans into one loan with an interest rate that’s equal to a weighted average of your current federal loans rounded to the nearest 1/8%. If you do consolidate federal loans into one loan, you’ll only have one payment — but you’ll lose the ability to pay off higher-interest loans first.

You can choose to refinance your federal loans and your private loans with a private lender, but by doing so, you may lose the benefits on your federal loans, including income-based repayment options, deferments, and loan forgiveness programs. You can, however, refinance just your private loans, which may help you lower the interest rates you pay. If you do choose to refinance with a private lender, you’ll need a good credit score and steady income.

Ready to take control of your student loan debt — and your financial future?

With interest rates so low, now’s a great time to refinance to lower your student loan payments, boost your cash flow, and save the money you need to reach your other financial goals.

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Citizens is here to help you navigate your student lending options for today and the future. Make sure to to visit our Student Lending page - we're on chat