Private student loans can help close the gap when paying for college if you've already maximized federal student loan eligibility. Knowing how to manage private student loans as a new or repeat borrower matters for staying on track with education debt. These expert tips can help you navigate private student loan repayment through 2020 and beyond.
1. Start paying off interest while still in school
Student loan servicers may allow a grace period while you're still enrolled in school, meaning you're not obligated to pay anything toward your loans. But it may be wise to at least make payments toward the interest.
"If a borrower has the financial flexibility to do so, it's always a good idea to start paying your student loans even while in college," said Kevin Walker, CEO of CollegeFinance.com.
To do that, you can contact your loan servicer and ask how to make payments while in school, Walker said. Even making small payments toward the interest can help reduce what you have to pay back later. If you're looking to lower your monthly payments to make paying off your student loans more manageable you may also want to consider a refinance (which we'll get to later). Use Credible to conduct more research on this topic to see if it's the right move for you.
2. Sign up for automatic payments
If you're already in student loan repayment mode, then putting payments on autopilot could be an easy way to save money.
"Nearly all private student loan lenders offer a borrower benefit of a rate reduction for automatic payments," Walker pointed out. This discount is typically 0.25 percent to 0.50 percent but over the life of your loans, that could add up to substantial savings.
Check your budget and cash flow to make sure automatic payments are feasible. You don't want to accidentally trigger an overdraft fee at your bank if an automatic payment is drafted that your balance can't cover.
3. Don't borrow more than you need
Only borrowing what you need to pay for school can keep you from ending up with more debt than you can manage.
Walker said the best way to approach this is to start with the number you think you need to pay for school, then take a closer look to see how you might be able to reduce it.
For example, he encouraged asking questions such as:
- Can you travel less often or go to school closer to home?
- Would renting textbooks be cheaper than buying them?
- Is getting a roommate to reduce housing costs a realistic option?
- If you're just starting college, can you leverage any AP credits earned in high school to accelerate your enrollment?
- Are you able to get a part-time or full-time job to help with living expenses?
- Are scholarships, grants or work-study options available to help pay for school?
Once you have an idea of what you need to borrow, consider what that works out to when it's time to begin student loan repayment. Running the numbers through a student loan calculator can help you get an accurate estimate of your payments.
Walker recommended considering what you expect to earn once you graduate. "If the monthly payment seems like it'll be too high, say more than 10 to 12 percent of your income, then you probably need to revisit finding ways to lower your total cost of borrowing."
4. Consider refinancing when interest rates are low
Refinancing private student loans could save money on interest and streamline student loan repayment. Walker said that generally, the best time to refinance private student loans is any time you can lower your cost of borrowing but be sure to shop around.
For example, you may want to weigh the benefits of a fixed interest rate against a variable interest rate when comparing loan options. But it's important to consider where your credit score and credit history fit into the mix.
Lenders typically offer the lowest interest rates on private student loans to borrowers with a solid credit history. If you have a thin credit file or a lower credit score, it may be necessary to ask a co-signer to help you qualify for loans at the lowest rates.
If you're not comfortable asking someone to co-sign, Walker said the other option is to work on improving your score before attempting to refinance. When you're ready to refinance, consider using an online tool like Credible to make comparisons. You can get rate quotes from multiple lenders without affecting your credit score.
5. Create a plan to pay off your debt
Private student loan debt can easily overwhelm you if you don't have a plan for paying it off. As you dive into student loan repayment, start by taking inventory of your loans.
"One simple thing all student loan borrowers should do - but often don't - is keep a list of the different loans they've taken on," Walker said.
Make a list of each loan you have and the monthly payment, as well as the due date. Next, compare the total payment for all of your loans to your budget to see if you can afford what you have to pay.
If your payments are higher than you'd like, consider refinancing if that could lower your rate and/or payment, Walker said. You can also look into interest rate discounts and any student loan forgiveness or repayment assistance your employer might offer as part of your benefits package.
Consider whether you could make extra payments toward the principal to get your loans paid off faster. And most importantly, stay in touch with your lenders.
If you're unable to pay because of financial hardship, they may be able to offer flexible repayment options, including deferment or forbearance programs. Head to Credible to learn more about private student loans and how to manage them.