Handling Student Loans When Your Parents Stop Paying
Editor's Note: Since the writing of this article, the federal Student Loan Debt Relief program has been blocked due to two court decisions; the Supreme Court has agreed to hear arguments for both appeals in February. In the meantime, the Biden administration extended the federal student loan payment pause into 2023. The US Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
There comes a time in every young person’s life when their parents cut the ol’ purse strings. That time may be different for different people, but it’s a rite of passage that happens to just about everyone, eventually.
You can almost hear the collective sigh, and the ensuing question being asked in unison on college graduation day: “My parents cut me off; what do I do now?”
While figuring out how to care for oneself financially is important for any recent college graduate, it’s especially true for grads new to making monthly debt payments such as for student loans.
Is there a big secret to being able to handle your student loan payments on your own? If there were it would likely be having the skills to manage all of your financials. Fortunately, these are skills that you can acquire so long as you’re willing to put in some work.
For recent college grads wondering how to pay for college loans when parents won’t help, here are some tips and tricks for getting your finances in order, making student loan payments, and setting yourself up for success now and into the future.
Learning The Details About Your Loans
If you took out student loans anticipating assistance, but your parents are not paying your bills anymore, you’re not alone.
You may be tempted to keep your student loans at an arm’s length, avoiding your monthly bills. Since that is not really an option, try taking control of your loans, knowing that you can only conquer them if you understand them.
One idea is to try putting all of your different loans into a spreadsheet, and include each loan’s monthly payment, the due date for each loan, the interest rate, any benefits the loan may offer (such as forgiveness), and the loan’s servicer. (That’s who you’ll be sending the money each month for your payment.)
Do your loans have grace periods? A grace period is offered on some federal student loans, and is usually a six-month period after graduation where principal payments are not due on student loans. There is a catch, though.
Most student loans still accrue interest during that time period, which is then smacked on top of the loan’s balance at the end of the grace period, further increasing how much you’ll have to pay back.
To help mitigate an increasing loan balance, you could consider making interest-only payments on your student loan during the grace period, if possible.
Not all student loans have grace periods. Contact your loan servicers to find out. Their contact information should be on your statements.
Also, you’ll want to do whatever you can to avoid missing payments. Not only could you be subject to penalties, but you don’t want to risk falling behind on your loans.
Do you have a calendar or planner that you like to use? Write down the due dates for each of your student loans. Put reminders in your phone or wherever you’ll see them.
Loan servicers typically also offer the option to set up automatic payments, which could help prevent you from missing loan payments. Some loan servicers even offer a discount if you enroll in autopay.
Understanding Your Monthly Expenses
A well thought out budget could become your best friend if your parents aren’t paying for college and other costs anymore. Taking control of your spending could be key to your success.
But before creating a budget, take some time to wrap your head around what living life costs. Pull up bank statements and gather together your bills. Review costs for your utilities like gas and electric, cable, and insurance to be sure you are getting the best value on what you payout each month.
Do these bills vary from month to month, or are they always the same? Will you need to pay the bills online, or send in a check? What day are your bills due? It could be smart to make a reminder of these dates along with the dates you’ll make student loan payments.
Sometimes, bills like cable can be negotiable. While you’re logging into accounts and looking at statements, now may be a good time to call your service providers asking them if they have lower rates available. It never hurts to ask!
Tracking Your Spending
Knowing where your money is going each month is considered to be a vital step to becoming good at managing your money. And whether or not it’s possible right now, the ultimate goal is to spend less than you earn.
Think of how many times a day we swipe our debit cards—sometimes it’s a lot. Therefore, everyone would likely need to find a strategy for tracking spending that works for them.
For some people, this may mean writing purchases down manually. For others, it could mean tracking in a spreadsheet or using a budget tracking app.
Cutting Back on Spending
College graduates are often stereotyped as living on a diet consisting of ramen noodles and beans, but if you had the help of your parents in college, you may actually need to learn to be more conscientious about spending after graduating.
This is especially true if mom and dad helped with your daily spending needs and your parents are not paying for post-college costs anymore.
Everyone has their own spending vice. For some people, it might be buying new technology. For others, it’s subscriptions that they don’t always use.
Others may have a penchant for ordering late-night Postmates delivery after a few cocktails at the bar. After you monitored your spending, was there anything about your habits that jumped out at you?
In areas where you felt that you overspent, did that spending reflect the amount of enjoyment or utility that you got out of that spending? And hey, maybe you’re thinking, “this spending was totally worth it to me!”
Well, then this might not be a category that you’ll want to cut back on. But if the spending wasn’t memorable, and this is where you can focus some of your cost-cutting energy.
Building a Budget
Now that you’ve got a good idea how much money you’re spending each month, it’s probably time to build a budget that includes your student loan payments, bills, and all discretionary spending. First, compare your monthly spending numbers against your monthly income.
Ideally, you spend less than you earn each month. With this in mind, one good idea is to set spending parameters in each category of discretionary spending (spending beyond bills) so that you don’t go over your monthly spending limit. For example, you could set budgeting categories like $25 for eating out or $40 for clothes.
It might take a couple of months to get the hang of budgeting, but don’t give up. Just like so many important skills in life, budgeting is learned and mastered through practice. The goal is to get to a place where budgeting is a habit you can do in your sleep. This skill will likely serve you for the rest of your adult life.
Trying to Avoid Carrying a Credit Card Balance
While credit cards can help college students and recent graduates through periods of emergency, be aware of how much they can end up costing in the long run, and once you add this up, you may look to minimize use as much as possible.
According to the Federal Reserve, the average interest rate is over 20%. Say, for example, a person racks up $5,000 in credit card debt.
According to this calculator from Bankrate , if that same person were to take three years to pay off the credit card at a 21% rate, they would pay roughly $1,689 in interest costs during that time. That’s in addition to the $5,000 in debt that they’ll also be paying back.
While credit cards can be a tempting option, it could also be easy to fall behind. Generally, the rule of thumb is to use them with caution, and consider other alternatives if you have them. For example, if you’re in the process of looking for full-time work, what temporary work can you pick up in the meantime to cover your bills?
Considering Refinancing Your Student Loans
IMPORTANT NOTE: Student loan refinancing of federal loans is NOT recommended during the federal student loan payment freeze that is in effect through Aug. 31, 2022. But under different circumstances in the future, or if you have private student loans that don’t offer forbearance and similar protections, student loan refinancing might make sense if you’re seeking a lower interest rate or monthly payment.
If you’re interested in reducing the amount you owe in interest on your student loans, student loan refinancing could be an option. While student loan refinancing won’t be for everyone, especially not for federal loans right now, it can help knowing that the option exists.
Student loan refinancing is the process of paying off your existing student loan(s) with a new loan at (ideally) improved financing terms. Should you qualify for a lower rate of interest, and depending upon the terms offered, overall interest on a new, refinanced loan could cost refinancing borrowers less over time.
To see the potential impact of a lower interest rate on your monthly payment, try playing around with a student loan refinance calculator. You might be surprised to see how much of a difference of even 1% can make on your total interest costs.
Both federal and private loans can generally be refinanced, though you may not want to refinance your federal loans if you have plans to take advantage of any of the federal student loan programs your federal loans may offer, such as student loan forgiveness or an income-driven repayment plan, or the current federal student loan payment holiday.
If you don’t have plans to utilize a federal loan program, or if you have private student loans, refinancing could provide you with the opportunity to have lower monthly payments or to pay off your loan more quickly.
Often, a financial institution has financial requirements for potential refinancers, such as a solid history of managing credit and a steady job and salary.
If you’re not there quite yet, or if refinancing doesn’t makes sense for you right now, it could be something to keep in mind as your career and financial situation progress.
This article contains breaking news and events related to the current state of politics and the economy. While we try our best to keep our articles as up-to-date as possible, the ongoing effects of COVID-19 are happening in real time and information is subject to change.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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