By Zina Kumok
If you haven’t started paying off your student loans, it might seem like a pretty straightforward process. The bill comes in the mail, you pay it and wait for the next one. Eventually, you make the last payment and sail off into the sunset.
While you could do that — and eventually you’d become debt-free — there are better ways to approach the process. Choosing the right loan repayment strategy can mean the difference between thousands of dollars saved over the lifetime of the loan.
So what loan repayment strategies are available to the average borrower, and how do you choose the right one? Here’s what you need to know.
Organize your loans
Organizing your student loans is the first step to devising a repayment strategy. You can find your federal student loans at the National Student Loan Data System.
All your student loans, federal and private, can be found on your credit report. You can look at your report for free at AnnualCreditReport.com. Once your loans are located, you may have to contact the lender directly to create an account for managing the loans online.
Next, create a spreadsheet and write down the lender’s name, the total balance, minimum monthly payment, interest rate, term length, and whether the loans are private or federal. This information will show which loans have the highest interest rates, allowing you to figure out which loans to focus on first.
It may be difficult to determine if a loan is federal or private because some private lenders also process federal loans. This distinction is important because federal loans have more repayment and forgiveness options than private loans. You may have to contact a lender directly to find out what kind of loan you have.
Look at your options
Once you’ve identified and located the type of loans you have, it’s time to look at your repayment options. Federal loans have income-based and extended alternatives, but the default is a 10-year plan. Private lenders usually have fewer options, but some may have extended or graduated payment plans.
You may be interested in applying for the Public Service Loan Forgiveness (PSLF) program, where graduates with federal loans can work at a qualifying non-profit or government job for 10 years in exchange for having their loan balance erased.
Some professions, such as doctors or nurses, have separate career-based forgiveness programs that pay for a certain amount if you work in a rural or low-income area. These programs usually require at least two to three years of work in an eligible position.
Set your goals
Your long-term goals will determine your loan payoff strategy. If you want to start your own business in the near future, for instance, you should avoid a loan forgiveness program that locks you into a certain position for multiple years. You may, on the other hand, consider refinancing your student loans to lower the monthly payment.
Look at your budget and decide how your student loans fit with the rest of your financial lifestyle. Borrowers having trouble making payments on federal loans should look into switching to a more affordable option, either by choosing an income-based repayment option or deferring the loans entirely.
Private lenders often don’t offer income-based repayment, but you can refinance these loans to a lower interest rate, lower monthly payment or both.
You can pay off your loans on time or ahead of schedule. Paying your loans off early saves you money on interest, and being debt-free can provide peace of mind. It also frees up money for other goals, like starting a nest egg for retirement or traveling around the world.
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. Her advice has been featured in Lifehacker, the Washington Post and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.