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We have a guest post today from David Chen, the blogger behind MillennialPersonalFinance.com. He writes about optimizing your personal finances on his growing blog. David is currently working to pay down student debt one paycheck at a time.
The first real financial challenge for many new college graduates is successfully managing their student debt after graduation. On average, student loan payments account for one-fifth of a new graduate’s monthly budget. As the average 2016 college graduate has $30,000 in student loan debt, the total cost of their education will be even higher once interest charges are factored in. After factoring in rent, utility, and insurance payments, the monthly student loan payments might be difficult to pay in full. Thankfully, several repayment methods exist to help graduates afford their student loan payments, making student loans one of the most flexible financial loans available when they enter repayment status.
If you have any private student loans, refinancing will be your best option. If you are struggling to afford your current monthly payment, refinancing allows you to lower your student loan payment by extending the repayment period beyond the standard 10 years. The longer repayment period will result in more interest charges, so a refinanced student loan can cost more overall, but, making more than the minimum payment when possible will keep additional interest charges to a minimum.
Any borrower can enjoy a smaller burden as the second benefit of refinancing is the possibility of receiving a lower interest rate. Even if you do not extend the repayment terms and only apply for a lower interest rate, your monthly payment will be smaller because you will be paying less interest each month. Over the course of several years, a smaller interest rate can literally save you thousands of dollars. Refinancing isn’t exclusive to student loans. Many homeowners refinanced their mortgages a few years ago to take advantage of historically low-interest rates.
When choosing a refinancing lender, you will want to choose one that does not charge origination or application fees. Plus, if you plan on paying off the loan ahead of schedule, you will want to make sure the lender doesn’t charge any prepayment penalties. Don’t worry, most do not charge any of these fees. You will have the option to apply for a fixed or variable interest rate starting at 2.23% and repayment terms can range from 5 years to 20 years.
Most federal borrowers with limited incomes will qualify for one of several income-based repayment plans. These plans currently limit monthly payments to 10% of a borrower’s adjusted gross income and any remaining unpaid balance is forgiven after 20 or 25 years of payments. Government employees and select non-profit employees can qualify to enroll in the Public Service Loan Forgiveness program that will forgive any unpaid balance after only 10 years of payments. Unfortunately, private student loans do not qualify for income-based repayment.
This perk is available to both federal and private borrowers and no additional paperwork is required to enjoy it. The only thing any student loan borrower needs to do is designate a bank account to withdraw the monthly student loan bill from each month. By doing so, most banks will reduce the interest rate by 0.25%. While this might not seem like a lot, the savings will add up over the course of the repayment cycle. And, it isn’t every day that lenders offer discounts.
Not only can automatic student loan payments help reduce your monthly payment, but, they can also prevent late fees. It can be real easy to forget to pay a bill when you are busy with life. A missed loan payment can incur late fees and also negatively affect your credit report. As long as there are sufficient funds in your bank account on the scheduled payment date, you will never have to worry about missing a payment again! In addition to scheduling automatic student loan payments, many utility and leasing agencies offer the same service to help you prevent being charged late fees.
If you have been blessed with a respectable salary and can afford to make more than the minimum monthly payment, “prepaying” your student loans can be the most valuable key to successfully managing debt. For example, a graduate with $16,900 in student loans at 6.8% interest will approximately pay $12,293 in interest with a standard 10-year repayment plan. By paying an additional $33 monthly, they can repay the loan one year early and save approximately $1,318 in interest charges. The savings grow even faster the sooner you plan to pay off the loan.
Prepayment isn’t exclusive to the original student loans that were issued as a college student. Most of the leading refinancing lenders will allow you to pay off a loan early without penalty fees. Even if you cannot pay ahead on your loans at the moment, this is a very useful card to hold until you eventually do receive a salary increase or reduce your other monthly expenses.