One thing I love about my job is empowering borrowers to understand and feel in control of their debt. But most people don’t need to work with an expert 1-on-1 to achieve this goal — they just need clear, understandable explanations of the basics. Here, I have put together a primer for the basic 4 steps I take when conducting a consultation with a client. If you want to mimic these steps on your own, they can help you learn the basics of your student loans and how to make your own plan to tackle them.
Step 1: What type of student loans do you have?
The first step in this process is figuring out what types of student loans you have. This can be more complicated to figure out than some folks realize. Student loans come in many different variations — more than 30 once you take into account every program that is still in existence. But here are the key things to find out.
- Is your loan private or federal? If it’s private, you will have to get further information directly from the bank, though some information may appear on your credit report. If it’s federal, it will appear on your Federal Student Aid log-in on.
- If the loan is federal, what kind of loan is it? In particular, you will want to know if you loan is Direct Loan, a Perkins Loan or a FFEL loan. These are different types of loans with different repayment programs available to them
- What is the current interest rate?
- What is the current balance?
- Is there any accrued interest?
- What is the loans status: is it in repayment, deferment or forbearance? If it’s in repayment, how much do you owe each month, and on what plan?
When I work with clients, I make a spreadsheet with this information so that they can view all the the information on their student loans in one place. You may want to do the same!
Step 2: What is your goal?
There are basically two situations you can be in as a borrower:
First, you may want to pay as much as you can to try to pay them off faster. This will minimize the interest you pay in the long run.
Second, you may want to minimize your monthly payment as much as possible. You may pay more in interest, but minimizing your monthly payments can make sense if you have a tight budget or you want to use public service loan forgiveness in the future.
Step 3: Depending on your goal, do some research and do some math
If you are in the first camp — you want to pay your loans off as quickly as possible — the next steps for you involve evaluating your monthly budget and setting a goal for how much you will pay each month. You can potentially look into refinancing to save even more on interest, but I only recommend that to people who feel secure enough in their jobs to give up the federal benefits of income driven repayment. Basically, if you want to pay the loans off as quickly as possible, just set yourself in a basic repayment plan you are comfortable with, and pay as much extra money as you can each month.
The more difficult work comes if you are in the second camp — if you want to minimize your monthly payments. In that case, you should begin researching repayment options. You can use the repayment estimator from the federal government to get a sense of your options. Make sure that your type of federal loans qualify for the repayment plan you want to enter. For instance, you will need to consolidate Perkins or FFEL loans into Direct Loans if you want to use the REPAYE plan. There can be a lot of nuance to these plans, so use the calculators to find one that is the right fit for you and your family.
Step 4: Execute the plan
Alright, now you have to execute: consolidate your loans; enroll in the income-driven repayment plan of your choice; set a budget; make extra payments (make sure they go to principal and not interest!). If you are applying for PSLF, make sure your loans and your repayment plan qualify for the PSLF program.
Make notes for yourself and set an annual check-in where you reevaluate your loans and your next steps.