7 Step Guide to Paying Back Student Loans on a Budget

Michael Lux Blog, Student Loans 9 Comments

Getting your student loans under control, especially on a budget, can be a daunting task.  If you are wondering where to find your loans, which one to pay of first, and whether or not you should consolidate; you have come to the right place.  The goal of this article is to serve as an introduction to paying back student loans and is loaded with tips on how to make your debt melt away as fast as possible.

Step #1: Find all of your debt

This sounds like an easy step, because one would expect that lenders wouldn’t want to keep the fact that you owe them money a secret.  Unfortunately, it actually takes a little bit of research to find out who you owe money to.  While you were in school, you may have forgotten about all the loans you took out.  Even if you remember each loan, it is possible that your debt was sold from your original lender to a new company.  Fortunately, if you know where to look, it doesn’t take much time to track down your debt.

All of your federal debt can be found at the National Student Loan Data System.  The NSLDS will tell you which federal lenders you need to get into contact with and how much money you owe in total.  It also tracks which debt has been paid off.

Private loans present more of a challenge.  Because there is no single index of all of the private student loan debt, your best bet is to find this information in your credit report.

For further information be sure to check out our page on tracking down your debt.

Step #2: Determine how much you owe and how much you can afford

This is really a two part process.  Part one is looking at each loan and making a note of the minimum amount due.  Part two requires you to make a budget to determine how much you can afford to pay each month towards your student loans.

Do you owe more than you can afford?  Now is not the time to panic.  We will cover a few different ways to get your payments lowered.  This step is all about figuring out where you stand on your monthly ledger.

Step #3: Lock in lower payments

This step is all about reducing how much you owe each month, without getting a deferment or a forbearance.  If you get a deferment or a forbearance when you don’t absolutely need it, you are making a mistake.

Getting lower payments on your federal loans is as easy as signing up for an income based repayment plan (IBR).  The income based repayment plans offered by the federal government ensure that your loan payments are never greater than 15% of your discretionary income.  Depending upon how much you make, it can be a chunk of change, but the plan is designed to allow you to stay on top of your debt and put food on the table and a roof over your head.

Getting lower payments on your private loans is much more difficult.  If you are having a really hard time making payments, some lenders will give you a lower interest rate for a year.  Just be careful that you are not running into any late fees and that your lender doesn’t put you on a forbearance or deferment — this route just allows your debt to grow.  The other way to lower your private loan payments is to consolidate…

Step #4: Make your consolidation decisions

You may have noticed that we treat federal loans and private loans very differently when getting our debt in order.  Consolidation is no different.  The options, perks, and pitfalls of consolidation are very different for federal and private loans.

Federal Student Loan Consolidation

Consolidating your Federal student loans does not actually lower your interest rate.  It does streamline your federal payments and it can help you qualify for student loan forgiveness (long story short: certain loans are not eligible for forgiveness, but are eligible for consolidation into a loan that can be forgiven… it is a bit complicated and covered here).  If you do decide to consolidate your federal loans, make sure you do it through the federal government consolidation site.  Quick tip: we have seen a number of “services” that consolidate federal loans for you, but all they are doing is sending in your paperwork and charging you for something you could have done for free.

In order to consolidate your federal student loans with the government, there is no credit check, and it can even been done if you are in default.

Private Student Loan Consolidation

Consolidating private loans is much different.  A credit check and steady income is required, but you can get much lower payments on your private loans.  It is also possible to consolidate your federal loans into a private loan, but we don’t recommend that for most people.

Private consolidation can be a huge positive for you in two ways.  First, it lowers your interest rate.  Second, it can extend the amount of time you have to repay the loan.  Both of these things mean a lower monthly payment.

If you are interested in private loan consolidation, be sure to check our our list of private student loan consolidation companies and reviews.

Step #5: Knock out your high interest private loans (those higher than ~7%)

High interest private loans are the loans that turn a student loan headache into a nightmare.  If you just make the minimum payment on these loans, the vast majority of it will be going to interest.  In many ways, high interest private student loan debt is worse than credit card debt.  Unlike credit cards, student loan debt is almost impossible to discharge in bankruptcy.  Credit cards are also more highly regulated than student loans – meaning that as a consumer, you have less protections in place.

Because this debt is so bad, you will want to take care of it first.  Remember when you calculated your minimum payments and how much money you could spare each month?  Take any extra money that you have each month and pay down your high interest private student loans.  Getting rid of this debt is something that needs to be taken care of ASAP.

Step #6: Work through your federal loans and low interest private loans

Deciding on which gets paid off first between your low interest private loans and your federal loans is a matter of personal preference.  This decision will depend upon your total balances and your aversion to risk.  For example, some people may think that if they can make 6% on investments, it is better to invest their extra money than to pay down a loan with 3% interest.  Others would rather get rid of the loan first.

Regardless of how you decide to knock out the rest of your debt, keep in mind that aggressively attacking one loan while making the minimum payments on all the others is often the optimal approach.  This is often called the snowball or avalanche method of debt repayment.

Step #7: Find your way to freedom from student debt

Getting rid of your student loans is great for both your finances and your mental health.  The sooner you get your debt under control, the sooner you can start thinking about retirement.