How Should I Start Paying Off Student Loans?

Congratulations new college graduate!  You’ve made it through college and you’re ready to move forward to the next adventure in life.  Hopefully, you studied well, had some fun and have found your first job (or in search of one).  I’m sure you’re excited to get started and actually accept some responsiblity for your own finances.  Perhaps not :), but I do remember thinking how fortunate I was to have a job and to actually write the checks (back when checks were around) for my rent and buy my own food.

But, I also woke up to a new responsibility I hadn’t thought about much during school.  Chances are, you’re waking up to the same responsibility too:  student loan debt!  So, while my first new job was nice, I didn’t get to have all the income at my disposal because I had a to start paying back my student loans.  I also had a new car payment and a credit card, but let’s save that for another discussion. So, the question you’re now asking (as was I): how should I start paying back my student loans?

How to get started paying off your student loans

Perhaps you’re ready to get rolling and get those student loans paid off.  I admire your motivation to get out of debt and manage your money wisely.  After all, paying off student loans and other debts are wise decisions as you’ll someday find out keeping debts around impedes your abilty to travel the road to financial freedom.  Before we dive into how to start paying your student loans, we need to first take care of some important first steps.

1.  Create a debt list

Student Loan DebtBefore getting started you need to fully assess your debt situation.  Do you have a car loan?  Do you have credit card debt?  You need to collect information on your student loan and other debts to determine how much debt payments will impact your monthly budget and meeting other expenses.  Here’s the information you want to collect for each loan:

  • Name of creditor
  • Creditor contact information
  • Minimum monthly payments
  • Balance due
  • Scheduled pay off date
  • Interest rate
  • Past payments due (if any)

With this handy information you can quickly understand your debt situation.  A quick measure important to know is taking the total of your minimum monthly debt payments and divide by your net income or your take home pay.  You can quickly see what percentage of your take home pay is attributed to paying debt(s).

Hopefully, it doesn’t exceed 5%, but it might if you got credit card happy in school and piled on a new car loan soon after graduating.  Don’t worry, we’re going to get you on a plan to get such difficult situations under control.

2.  Setup a budget

Next, let’s talking budgeting.  Before you can start paying off your student loans or other debts, you should have a monthly personal budget to determine how your money will be allocated and expenses will be met.  If you haven’t started a budget before, check out this video which discusses 3 easy steps to create a budget.  Or, read How to Create a Budget.  They key is to determine the following: 1) do you have enough money to make the minimum payments on your debt(s) and 2) can you pay extra?  Learning how much to budget for each category will help.  Hopefully, your expenses are minimal at this point in your life and you have some extra money to put towards a debt payment plan.

3.  Answer the question:  should I pay off my student loans first?

Assuming you have extra money to contribute to debt(s), there are different schools of thought as to whether or not you should pay off debts with highest interest, or lowest balance first.  Personally, I like a hybrid approach.  I typically like to see people pay off credit card debt first because it has the most ridiculous interest rate and can cost you the most in the long run.  However, if you have a small loan balance in which you can pay off within 2-3 months to get a sense of accomplishment, you may decide to pay it off first.  Typically, student loans carry larger balances and lower interest rates.  In most cases (not all), these loans can be paid off last in your debt plan.

If necessary, ease the pain of paying off your student loans

You have a few options according to Kiplinger.com, if you find you’re struggling to meet expenses, pay off debt and/or make student loan payments.  While these tips won’t make your loans go away over night, they may help you get your feet on the ground.

Postpone payments

You can defer your student loans if you go back to grad school [that's what I did], can’t find a job or are experiencing economic hardship.  If you do defer your loans, don’t forget they’ll still accumulate interest.  My advice:  use this as a last resort only.  It’s better to get the ball rolling and knock out your debt plan.  In other words, make some other sacrifices if you can to keep paying on them.  For example, avoid acquiring a new car loan right out of school

Lower your payments

If you’re having trouble making payments you can also have them stretched out over a longer term.  Of course, you’ll pay more in interest, but it might make sense if you need to get your financial situation in order first.  You can bump up your payments, or pay more later to knock down the interest costs.

Consolidate your loans

Not necessarily a measure to get a lower rate, but you can have convenience of one payment versus many.  I also did this when I graduated and it was a nice convenience.  Just be careful that you’re not stretching the term out a lot longer than what you would have if you didn’t consolidate them.

Don’t forget

I couldn’t let you go without providing just a few more essential tips:

  • Don’t forget you also have the ability to deduct student loan interest (if your eligible) to save money on taxes.
  • Make sure you’re able to save money.  You may be motivated to pay off debt, but you need emergency savings to avoid credit card usage.  Save a $1000 in an only high yield savings account such as ING’s Orange Savings Account before paying extra on any debts.
  • Track your expenses:  Once you your budget is set up, make sure you’re tracking your expenses against each budget category to insure you’re staying on track and can dedicate money to savings and debt

What do you think of these tips to get started in paying off student loans?  If you’re a reader with student loans, or have paid them off, what additional tips can you share?

About Jason Price

Hi, I'm Jason Price, family man saved by grace, passionate about faithful stewardship, soccer and the Pacific sun. I write about money, career and business here at www.onemoneydesign.com.

  • http://www.personalfinancebythebook.com Joe Plemon

    Jason,
    Good solid advise spoken by someone who has been there. I particularly appreciate saying that student loan deferment should be used only as a last resort only. I have seen graduates defer their student loans, then pretend they don’t exist and build up additional debt. Bad plan.
    .-= Joe Plemon´s last blog ..Why Joe and Jan Do Not Have Long Term Care Insurance =-.

    • http://www.onemoneydesign.com Jason Price

      Thanks, Joe. Yes, I’ve come across a few cases like that myself. It’s a wake up call later in life when the loans are still hanging around.

  • http://www.moneycrush.com Jackie

    The biggest tip I have for paying off student loans is “don’t get used to them”. It can be easy to get into the cycle of deferring them as things come up, but before you know it 10 years will have gone by and they’ll still be there.
    .-= Jackie´s last blog ..Handling Life’s Big Financial Changes =-.

  • http://aceofwealth.com Ace @ aceofwealth.com

    I think your first step is really important. However, I think that the tip you mentioned at the bottom of the article should be incorporated into this list. If you get some kind of tax deduction (a deduction that you can take regardless if you do an itemized or standard) then the actual effect of the loans could be much less than they seem to be at face value. Here’s what I mean:

    Say you are in the 25% tax bracket, then you will get back 25 cents of every dollar you pay in interest. This makes the effective APR less than the loan APR. Because of this, and the fact that student loans typically have lower APR to begin with, they should be towards the bottom of your list of loans to pay off.
    .-= Ace @ aceofwealth.com´s last blog ..Breaking the status quo =-.

    • http://www.onemoneydesign.com Jason Price

      Ace, I suppose it depends on which method of debt pay off you prefer. If you’re following the debt snowball (lowest debt first) you would work on the student loans if they had the lowest balance regardless of the tax deduction. The student loans would most likely be at the bottom of the list if you pay highest interest debts first. Personally, I like the snowball to get people excited about paying of debt and to gain some momentum. Then, reconsider how the remaining debts will be paid. The tax deduction definitely makes them cost less, but in the end they’re debt too and should be eliminated as quickly as possible.

  • http://www.overturemarketplace.com Tia

    Awesome! I think the biggest thing to remember (and the hardest lesson learned, even for me) is to be honest with yourself about what’s going on, and to not be overwhelmed by the debt.
    .-= Tia´s last blog ..10 Tips for Paying Back Your Student Loans =-.

    • http://www.onemoneydesign.com Jason Price

      Hi Tia, I would agree to try not to become overwhelmed. There is relief from stress and anxiety with a good plan and living by God’s financial principles.

  • http://www.churchfinancing.biz Church Loans

    Jason,

    I tend to agree with you that placing a high priority on paying off credit cards as early as possible is necessary. There are so many loopholes that allow the banks to raise the interest rate on the card. I have a cousin who took her credit payment to her bank on time and the bank was slow in sending the money to the credit card processing facility. They subsequently raised her rate to 21%. Our government has imposed stricter laws on banks to try to stop some of this “highway robbery” but I suspect much of it will continue.

  • Mark

    I agree with #1, it really starts buying prioritizing, and paying down your highest interest debt first.