With the cost of college increasing every year, tens of millions of students rely on loans to cover the rising expense of tuition, fees, books, and room and board.
The average 2014 college graduate has $33,000 in student loan debt, more than any previous class.
While repaying student loans is never easy, we have 10 smart tips for minimizing penalties and budgeting for your future.
Tip #1: Understand the terms of your loan.
Loans are a brand new concept to most college students.
Take the time to speak with your financial aid office about the specific terms of your loan, including the interest rate, the principal and the size of your minimum monthly payments after you graduate.
This will help you devise a repayment plan well before the first check is due.
Tip #2: Start repaying as early as possible.
Most federal student loans come with a grace period before you have to start repaying the loan, usually six to nine months after graduation.
If you have a good part-time job (or generous parents), there’s nothing stopping you from making early payments, either right after graduation or when you’re still a student.
The more you pay early on, the less you will ultimately owe in interest. Tweet this
Pay attention, though, because some lenders actually charge a penalty for early repayment.
Tip #3: Stay in touch.
Recent college graduates tend to follow career opportunities, moving frequently to chase a better job.
Make sure to notify your lenders about changes of address.
Even if you get most of your loan information via email, you don’t want to miss out on important notices that could still come through snail mail.
Remember, missing a bill is not an excuse for missing a payment.
Tip #4: Get a job.
Getting a part-time job in college or during the summer has its obvious benefits: The more money you earn toward paying for college, the less you will have to take out in loans.
But there are other reasons to work during your college years.
By getting entry-level jobs or internships in different fields, you can see which kinds of jobs are a good fit and how much they pay.
It’s better to experiment now rather than after graduation, when student loan payments are due.
Tip #5: Budget and save.
It’s never too early to start living on a budget.
Sticking to a budget doesn’t mean denying yourself everything fun.
It simply means taking a close look at how much you earn and dividing it up among recurring expenses (rent, food, gas), and extras like entertainment and clothes.
If you make enough, put some aside for savings or start paying off your student loan early.
Tip #6: Pay off the highest-interest loans first.
Luckily, most federal student loans carry relatively low interest rates.
But if you’re supplementing a federal loan with a private student loan, it’s smart to pay down the higher-interest loans first.
Don’t ignore the federal loans altogether — you still need to make minimum monthly payments — but pay down the private loans as quickly as possible.
Tip #7: Enroll in auto-pay.
The best way to stay on top of student loan payments is to have the payment automatically deducted from each paycheck.
If you are paid twice a month (biweekly), make a loan payment twice a month. It chips away at your principal faster and lowers interest over time.
Tip #8: Claim the student loan interest deduction.
The IRS lets you deduct all interest paid on a qualified student loan on your yearly tax return, regardless of whether you take the standard deduction or itemize deductions.
The deduction is capped at $2,500 and is phased out for high income earners.
If you are claimed as a dependent on your parents’ return, then they can take the deduction. If you’re also filing a tax return, you or your parents can claim the deduction, but not both.
Tip #9: Know your repayment options.
If you lose your job or run into another financial setback that makes it impossible to keep up with federal student loan payments, you have some options.
You can apply for an unemployment deferment, which pauses payments until you find a job. Or, you can ask for forbearance, which can reduce or stop payments for up to 12 months.
Keep in mind that interest continues to accrue even if you’re not making payments.
There are also programs like AmeriCorps and the Peace Corps that offer loan forgiveness for certain types of federal loans.
Tip #10: Don’t default!
If you get too far behind on your student loan payments, you will eventually go into default.
Defaulting on a student loan could severely damage your credit, making it difficult to qualify for future credit, including a home mortgage or car loan.
If you’re having trouble making payments, contact your lender about deferment, forbearance or loan consolidation before it’s too late.