PerkStreet Financial

This post is the second in  series of  posts by Kevin Mulligan about specific steps to take to get out of student loan debt.

Now that you’ve taken the first step (congratulations!) you’re ready to move forward and get rid of this debt once and for all.

Step 2: Minimize the Financial Impact with Simple Changes

The second step is to work to minimize the impact the loans have on your finances. This could be interpreted two different ways: minimizing interest paid and minimizing your monthly payment.

Minimize Interest Paid

You took out a loan. You have to pay it back. You could take your time and stretch out the payments, but you’ll pay for it. The faster you pay it back the less interest you end up paying.

To minimize your student loan interest just start paying it back as quickly as possible. You can pay more than the minimum monthly payment just like with any other loan. (With any loan — not just student loans — you’ll want to check your loan documents to insure there is no prepayment penalty.)

Additionally you can get your interest rate reduced by 0.25% to 0.50% by setting up automatic debit from your checking account. On a $20,000 loan at 6.8% interest rate and 10 year repayment that rate reduction will save you anywhere from $306 to $610.

Minimize Monthly Payment

But what if you have so much student loan debt that you can’t afford the minimum monthly payments? It’s too late to cry over spilled loan money, so we’ll tackle what you can do.

You can:

• Increase the length of your repayment plan up to 25 years. You’ll pay more interest, but this will reduce your monthly payment.
• Request deferment or forbearance. There are specific criteria (financial hardship, unemployment, illness, etc.), and you do eventually have to start paying the loan back. This is more of a temporary stop in payments.
• Work in public service. Again, special criteria apply, but if you work in public service you can have some of the debt forgiven. This won’t actually reduce your monthly payment now — it just reduces or eliminates the loan balance.
• Consolidate. Take your two $10,000 loans, combine them into a $20,000 loan, and increase the repayment period. You get one payment, a smaller monthly balance, and (unfortunately) higher interest paid over the life of the loan.

Step 3: Avoid Student Loan Mistakes

The third step is to avoid simple mistakes that can cost you more of your hard earned money:

• Ignoring mail or e-mail you receive from your school or lenders. Open everything and read carefully!
• Assuming the lender received your payment. Verify your payment was received via your online loan management website.
• Assuming all of your loans don’t accrue interest until after you graduate. If you don’t know, ask! Begin paying on the ones that are accruing interest if you have the means.
• Not automating your loan payments. You can save on your interest rate plus be virtually guaranteed your payment was received on time.

Have you started this process? Where are you in these steps? Was this information helpful? Email us and share your story!

Related posts:

1. Step out of Student Loan Debt: Step One
2. Credit Card Debt Reduction on Hyperdrive
3. Moving Toward a Mortgage