Do your student loans keep you up at night? Are you afraid of looking at your total remaining balance because the mere thought of such a large number makes your stomach drop? If you answered yes, you’re not alone. There are certainly reasons to be worried from a big picture perspective. According to a recent Wall Steet Journal report only slightly more than half of student loan borrowers are current on their loans, and a shocking 15% are actually in default (meaning they at least a year behind on their payments). Outstanding student loans now total $1.2 trillion; nearly double the amount of outstanding credit card debt.
Okay, those are some big numbers, but that doesn’t mean you need to sweat. Even if you’re totally clueless about where you’re at with your payments, there are a few simple things you can do to at least get a reality check. If you’re anything like me, the reality isn’t as bad as you think.
#1: Figure out when your repayment date is
We’ll start out with what is potentially the best part of this exercise: the light at the end of the tunnel. Most borrowers start out with a standard repayment plan of 120 monthly payments, or 10 years. Although it may seem like a long time, it will sneak up on you. A 22-year-old college graduate will be fully free of student loans by the time they’re 32. In my case, I had an unconventional college career and didn’t actually graduate until I was 26. I was 27 when I first started paying loans, which means I’m five years into the standard repayment plan. Halfway there! You can calculate your own repayment on the U.S. Department of Education’s website.
#2: Make sure you’re not treading water
While you’re looking at your repayment date, you might be a little shocked (I was) at how much outstanding principal you have on one or more of your loans. Depending on your interest rate, you may be paying a lot more than you think towards interest. This isn’t inherently bad, but it could be cause for concern if the majority of your monthly payment is just paying principal. If that’s the case, you may want to consider refinancing (more on this in a second) or talking to someone at your loan servicer(s). Keep in mind, the IRS allows you to write off a substantial portion of your student loan interest paid every year, so it’s not a total loss. However, if you’re treading water and making little progress toward fully repaying your loans, you need to figure out a better plan.
#3: Know what refinancing really means
Refinancing student loans is such a popular concept even the presidential candidates have incorporated aspects of it into their campaign promises. If you’re unfamiliar with how debt refinancing works, it’s pretty simple: in exchange for a lower interest rate, you essentially start the term of your loan over again. While your monthly payment can be lowered significantly, you may end paying more over time. If you’re just starting out—maybe a year or two into your repayment—then refinancing could be a good option. You may take a couple more years to repay, but if you’re putting extra cash into your pocket that might be better for your overall finances (you could also pay more principal, but we’ll get to that in a moment). On the other hand, if you’ve already been paying your loans for several years, then refinancing might be a very bad idea, because you’ll end up paying longer than you need to. If you’re a public employee, you also reset the clock on any potential public service loan forgiveness.
#4: Pay a little more now to pay way less later
Here’s something I really, really wish I knew five years ago: you can pay as little as $20 more a month on your payment and wipe out one or more of your loans years early. I did the math, and it turns out if I’d kicked in the equivalent of a Frappuccino a week for the last few years, one of my loans would be paid off a full four years early. Imagine how many Frappuccinos I could have bought with all those savings?! OK, maybe that wouldn’t be the smartest purchase, but a few hundred extra dollars in my 401(k) would make a big difference over time. Will you reward your future self with a little extra dough? It’s something to consider, or at least try to make happen. Every little bit counts.
Do you still feel overwhelmed by your loans? What would you do with your student loan payment if you didn’t have to fork it over every month? Leave your thoughts in comments.