Managing the Costs of Student Loan Debt

College graduation is a major milestone for many, but the excitement of receiving a diploma can be dampened if a hefty student loan bill comes along with it.

If you graduated with a sizable amount of debt, you aren't alone. The high costs of college mean it’s common for graduates to finish school with thousands of dollars in student loans to repay. The amount of student loan debt in the U.S. totals in the billions, with millions of former college students in the red.

Though repaying student loans might feel overwhelming, educating yourself about your obligations and available options can help you develop a plan to tackle your debt and set your priorities when it comes to budgeting.

Understand Your Loan Type

Identifying the kind of loans you have is the first step toward developing a repayment plan, as the type of loan can greatly influence the number of options you have and how much you'll have to pay over the life of the loan.

Student loans come in two broad categories. There are federal student loans, which are administered by the U.S. Department of Education, and there are private student loans, which are issued by non-government lenders, including banks, credit unions and companies like Sallie Mae.

Federal loans have strict eligibility requirements determined by the Free Application for Federal Student Aid (FAFSA). They have fixed interest rates that are also generally lower than private loans, but you can only borrow so much under federal loan programs. You don't need a credit check or a cosigner for most federal student loans.

Federal loans offer some important benefits, including various income-based repayment plans and forgiveness programs and deferment if you return to school. They also offer a 0.25 percent interest rate deduction if you set up automatic payments.

On the other hand, private loans don't require a student to demonstrate financial need and aren't capped, but that trade-off comes at a price. Whereas federal loan interest rates are fixed, private loans often charge variable interest rates that are typically higher than the interest rates available for federal loans. Repayment options tend to be more limited and less flexible. Each originator will have its own terms, so be sure to read up on your exact interest rate and repayment options.

Know Your Payment Terms

it’s important to understand when you’re expected to begin repayment because missing your first loan payment can have severe consequences and impact your future ability to take out debt.

Federal student loans typically have a grace period of six to nine months after graduation, depending on the type of loan. Private loans can vary greatly, with some lenders expecting repayment immediately after you graduate or drop below half-time status.

Grace periods give graduates a chance to get their feet under them, but they can also offer an opportunity to save on interest. If you begin repayment on a subsidized loan early, before your grace period ends, you might be able to make a substantial dent in the balance before interest starts to accrue.

You’ll also want to note if your loan has a loan servicer, which is a company that handles the billing and other services of your loan on behalf of the lender. If so, the servicer will be the one sending you your monthly bills and where you’ll direct your payments.

Explore Forgiveness Programs

If you have federal loans, you might be eligible for one of the various repayment or forgiveness programs.

• Teacher Loan Forgiveness Program: Teachers who work full-time for five years in certain schools that serve low-income families and who meet other qualifications might be eligible for forgiveness of up to $17,500 of federal loans.
• Federal Student Loan Repayment Program: Borrowers who work for a qualifying government agency for at least three years can have $10,000 a year, up to a total of $60,000, awarded toward the payment of their student loans. 
• Public Service Loan Forgiveness Program: Borrowers who work in qualifying public service jobs, such as government or not-for-profit organizations, can have the balance of their federal loans forgiven if they meet a number of criteria, including 10 years of loan payment.
• SAVE Plan: The newest income-driven repayment plan, the SAVE Plan, bases payments on eligible borrowers’ income and family size, eliminates any remaining unpaid interest if borrowers make their full monthly payment, and offers the potential for loan forgiveness in as few as 10 years.

Investigate All of Your Options

You might want to look into student loan consolidation and refinancing, particularly if you have high interest private debt. If you have good credit, you might be able to get a lower rate on your loans than the one you received upon origination.

Consolidation isn’t for everyone, though. Federal loan holders, in particular, might want to think twice. If you refinance federal loans, you might lose access to some of their key features, including public service forgiveness or deferment.

Before making any decision, carefully consider your old and new rates, plus any fees that may come along with the consolidation. Compare the payoff amount—the total amount you'll owe, including interest, as a longer payoff period could end up costing you far more.

One helpful way to do this is to use a Loan Calculator, like the FinAid Calculator. For federal loans, you can also use the Federal Student Aid loan simulator, which can help you choose a repayment plan, decide if you should consolidate, and see how much your payment might change if you took out additional loans.

If you’re devoting a large portion of your monthly income to student loan payments, you might feel like you’re missing out on other financial opportunities, such as saving for retirement. Many employers provide matches for employee contributions to company 401(k) plans, and you might feel as if you’re leaving money on the table if you’re unable to set aside the maximum amount. However, some employers now offer the benefit of making 401(k) or other retirement plan matches based on qualifying student loan payments. If your student loan payments are making it difficult for you to contribute to your company’s plan, ask your employer if this matching option is available to help you start saving for your future.