The road to zero – the path you’ll take to pay your federal student loans down to zero – takes strategy and planning. To create a successful strategy, you will need to reflect on your personal, professional and financial goals as well as your current financial situation.
While it may seem overwhelming to get started, the steps below will walk you through what you need to know and guide you in creating a loan repayment strategy that works for you.
1.Know What You Owe
Before you can begin thinking about repayment options, you must first understand what you owe. Retrieve your federal loan information online at the National Student Loan Data System (NSLDS), which is the U.S. Department of Education’s database for federal student aid. Pay attention to the types of loans you have, how much you owe on them and who will be servicing each of your loans. You may also have other debt—private education loans, credit cards, mortgage, etc.—that should also be considered as you make strategic decisions about your repayment plan.
2.Understand Your Options
Now that you’re aware of your outstanding debt, it’s time to talk options. Federal loan borrowers have a number of repayment plans available to them. Choosing the right plan can have a long-term effect on your overall financial wellness, so it’s worth taking the time to compare all of your options. Some may require a higher monthly payment amount over shorter repayment term while others offer you the flexibility of lower monthly payments over a longer period of time (along with loan forgiveness).
Debt-driven repayment plans calculate your monthly payment based on your total student loan debt, the interest rate on your loans and the length of your repayment term while income-driven repayment plans calculate that monthly payment based on your income, family size and state of residency.
For more detailed information about the most common federal student loan repayment plans—including eligible loan types, eligibility requirements, repayment timeframes and more—download the Federal Loan Repayment Plans at a Glance from AccessLex institute, a nonprofit organization.
3.Define Your Strategy
Now that you have a solid understanding of your student loan debt and the options available, it’s time to create a repayment strategy that works for you. You may have borrowed the same amount as the person sitting next to you, but your repayment strategy will probably be different given your personal, professional and financial goals.
Start by asking yourself the following questions:
- What types of student loans do you have? And when did you borrow those loans? – Some repayment plans are only available for specific types of loans borrowed at a specific time.
- Are you married or planning to get married in the next few years? – With some of the income-driven repayment plans, your tax filing status can affect how your monthly payment is calculated and whether your spouse’s income and education debt is considered.
- What are your career plans? – You may have additional options if you are considering public service work.
- What helps you sleep at night? – Are you debt-averse and want to pay off your loans in a short period of time? Are you worried that you won’t be able to afford your monthly payment?
The answers to these questions will help to guide you toward a repayment plan and strategy that works for you, your current situation and your future financial goals. Don’t forget to do the math and use a loan repayment calculator for a complete picture of your repayment commitment and to see how those payments fit into your monthly budget.
4.Set Yourself Up for Success
Regardless of which repayment plan you start with, remember you have choices. Once you begin making payments, you don’t have to stay in the same repayment plan until your loans are paid off; you can actually change your repayment plan once a year if you’d like.
To ensure that you are setting yourself up for future success, review your repayment choices at strategic points along the way—such as with a change in job, salary, relationship status and/or family size. At the very least, you should review your repayment strategy each year to make sure you are still on track to achieve your financial goals. If you’re not, consider your options and determine if you can get back on track with a different repayment plan.
What is your strategy on your road to zero?
Guest Contributor: Jennifer M. Schott, AFC®