Student loans are terrifying, but unavoidable for most of us. For many young adults, student loans are the first time we deal with this scale of finances. Making the wrong decisions here can have a lasting impact on our future in everything from a damaged credit report to a difficult time purchasing a house.
When I graduated from high school, the amount of money I saved for college was $0. And my parents didn’t have a college fund set aside for me. I am from the school of thought that if I want to attend college, paying for it is my responsibility, not my parents.
That idea is fine, but until the age of 25, I still needed their help to complete the federal application for student aid (FASFA) since I was a dependent student. Several years later, as an independent graduate student who has taken out numerous student loans, here are my tips to making smart choices and keeping student loan debt under control:
Send Excess Funds Back to the Lender
During my first year of college I took out a private loan I didn’t need. When my school received the excess funds, they sent me the check – a whopping $18,000. At 18-years-old and struggling in my first apartment, that check was more than appealing, but I put my hand on my heart when I say “I sent it back.” And I recommend other student’s do the same.
Send back those excess funds! Unless it’s for tuition, books, or other academic related expenses, send it back because those funds accrue interest. Even a small amount of money adds up if it becomes a habit.
Make Interest Payments in School
I got the strangest look from friends when I told them I voluntarily made interest payments on my loans while in school. My parent’s just looked proud, but they always look proud. I make sure that each month I find room in my budget to pay the interest off on my student loans.
And yes, I mean interest, not principle, but this is why. Interest is bad enough, but when my loans go into repayment after I graduate, the interest capitalizes. This means that any interest that was already there becomes principle, and then it, too, begins accruing interest. I have no desire to pay interest on interest so I make sure that I pay it each month.
Look at Repayment Options
After graduating from college, I knew I couldn’t afford a standard repayment option. My loans are serviced by Sallie Mae, which is convenient, but federal loans have different repayment options than private loans. I opted for the Income-Based Repayment Plan, which sets my payments up in accordance with my monthly income.
The difference in my payments was tremendous, and I didn’t realize how much until I accidentally let my payment plan lapse, which leads me to my next step.
Pay Attention to Student Loan Accounts
I check in on my student loan account at least twice a month. Because the same lender manages my private and federal loans, I only have to visit Sallie Mae. When I missed the notice from my lender that my Income Based Repayment Plan was about to expire, I saw my nice monthly payment of $129 skyrocket to $368. Thankfully, I filled out the new form in time to have the payment reduced. However, this is why it is important it is to pay attention to these accounts.
Know What You Owe
The most important piece of information I have is not to avoid student loan debt. When I first began taking out student loans, I knew exactly how much I borrowed at any given time. On the other hand, I had friends who were about to graduate and had no idea how much debt they had accumulated.
The National Student Loan Data System holds all student financial aid information from all schools that receive Title IV loans and grants. While logging into this site is not always a pretty picture, at least I know how much money I owe.
Go to StudentLoans.gov to fill out a FASFA application, and learn more about repayment plans.