Congrats to the Class of 2016! May your lives after graduation be a reflection of everything you’ve worked so hard for – a successful career, stable finances, and much more. And if you’re one of the 40 million people in the U.S. with student loans, may your student loan repayment strategy help you eliminate that debt efficiently, so you can focus on your life’s journey.
Make no mistake – student loan repayment does require a strategy. Right now, it might seem as simple as picking a repayment plan and writing the first check, but the decisions you make today and during the course of the loan can affect how much interest you pay in the long run. A smart repayment strategy ensures that you don’t spend a penny more than is necessary.
Student loans may be a fact of post-grad life, but you can take four steps to put your repayment strategy on the right track:
1. Know Exactly What You Owe
Chances are you haven’t looked at your loan statements since you signed on the dotted line. So spend time getting reacquainted. Find your federal loans on the National Student Loan Data System (NSLDS) website .
If you’ve got private loans, gather your statements or check with your school’s financial aid administrator. Many private loans are also listed on the Clearinghouse Meteor Network . If necessary, pull your credit report ; all of your loans will be listed there.
Once you’ve tracked everything down, make a list of your loans and their important details—the type (e.g., Direct, PLUS, private), the balances, and the interest rate you’re charged for each. This information is key to intelligent planning.
2. Understand the Grace Period
Some student loans offer a grace period of several months (six, usually) after graduation before you’re required to start making payments. This can come in handy if you haven’t yet found employment or you’re taking a break before entering the working world.
Just remember that the interest clock is usually ticking on most unsubsidized and private loans during this timeframe. Those loans begin to accrue interest the moment they’re disbursed, and will continue to do so throughout the repayment period.
At that point, the accrued interest is capitalized and added to a loan’s principal, which means that you end up paying interest on a larger loan balance. Translation: higher interest cost for you.
Bottom line? Use the grace period if you need it, but consider making at least interest-only payments during this timeframe in order to save money long-range.
3. Do the Math
Most lenders will offer you a choice of repayment plans, allowing flexibility around the length of the repayment term (e.g., 10 years vs. 20 years), which impacts your monthly payment amount and total interest cost. While it might be tempting to choose the option with the lowest monthly payments, the long-term repercussions can be costly.
For example, let’s say you have a $100,000 student loan at a fixed 6.8% interest rate. If you pay it off in 10 years, your monthly payments will be $1,150, and the total interest will be $38,096. If you extend the term to 20 years, your monthly payments will go down to $763 but your total interest will spike to $83,201. If you can afford the higher monthly payments, you can save more than $45,000 in interest with the 10-year plan.
Recommended: Explore our student loan help center for tips, resources, and guides to help you navigate your student loan debt.
However, the most important factor is the ability to pay your monthly student loan bill, because missing or making late payments can have a disastrous effect on your credit. If you need to choose a lower payment option initially, do so.
But when you’re able, switch to a more aggressive plan or keep the longer term but pay more than the minimum each month to accelerate loan repayment. The sooner you do, the less interest you’ll pay and the faster you’ll be done with your loans.
4. Consider Refinancing
One of the best ways to save money on interest is by lowering your interest rate, and the only way to do that is through loan refinancing. Refinancing typically requires the borrower to have a solid income and a track record of capably handling debt.
So if you’ve landed a great job and have a history of managing loans and credit cards responsibly, lowering your interest rate may be a cost-saving option for you.
Using the above loan example, let’s see what happens if you refinance that loan at a lower rate. By refinancing a $100,000, 6.8%, 10-year term loan to 5%, your payments would go down to $1,060, and your total interest would be $27,278. In other words, refinancing would mean lower monthly payments and a total savings of almost $11,000.
But before refinancing federal student loans, remember that fed loans offer benefits like potential loan forgiveness and income-based repayment plans.
These programs don’t transfer to private lenders, so it’s important to know whether they apply to your situation before refinancing. If you don’t benefit from these programs, and saving money is your priority, refinancing federal loans can be a cost-saving option.
When ready, do the math on refinancing your own loans using our student loan calculator.
Keep Your Eyes on the Prize
Arguably the most important aspect of any student loan repayment strategy is to keep a positive, can-do attitude. When starting out, each monthly payment can feel like a drop in an ocean. But stick with it, increase your payments when possible, and soon you’ll build momentum and experience some satisfying results.
While there’s no one-size-fits-all approach to determining the very best strategy, if you take time to understand all of your repayment options, you can create a course of action that works best for your situation, saves you money over the long term, and works toward paying off loans as efficiently as possible. An effective plan will allow you to focus on what’s really important: life after graduation.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.