After an extended break from federal student loan payments and interest, millions of borrowers will soon start making monthly payments for the first time.
Those who have made payments before will find that things have significantly changed. Between servicer changes, new rules, and temporary programs, things will look much different.
Today we are going to cover all of the basics. You will learn the repayment mistakes to avoid and get tips on minimizing the impact of student debt on your life.
This is a longer article, but it’s not all required reading. Many sections may not apply to you. Scroll through the sections that don’t apply and focus on the ones that do.
Did I miss something? If you have a question about your first student loan payment that isn’t covered here, please leave your question in the comments. I’ll be sure to answer it, and you could help others who come here with the same question.
Your Very First Federal Student Loan Bill is a Lie
When federal student loan borrowers receive their first bill in the mail, the minimum payment due is often a very large and terrifying number.
The first student loan bill is based on the 10-year standard repayment plan. For most borrowers, the 10-year plan has the largest monthly payment.
Borrowers can spread payments out over 25 years, dramatically lowering monthly payments. Better yet, borrowers can make payments based on what they earn each month to ensure that payments stay affordable. This income-driven repayment route also provides a path to student loan forgiveness.
The biggest mistake new borrowers make is ignoring that bill. Don’t bury it in a drawer because you can’t afford it. Your student loan situation isn’t nearly as bad as it may look on that first statement.
Know the Difference Between Federal and Private Student Loans
The payment pause and interest freeze only applies to certain federal student loans. Repayment of most private loans has been business as usual.
This distinction is just the tip of the iceberg. There are numerous critical differences between federal and private loans.
Federal loans have income-driven repayment plans and student loan forgiveness options. Private loans don’t.
Most borrowers will conclude that addressing their private loans is the more pressing issue. Others may decide that low interest rates make private loans less of a concern.
Either way, borrowers must identify which loans are federal and which loans are private. This distraction makes a huge difference when putting together a repayment strategy.
Are my student loans federal or private? If you are unsure whether your student loans are federal or private, the best bet is to access the federal student loan database.
In this database, you can find records of every federal student loan you ever borrowed, loan balances, and servicer contact information.
Don’t Worry About the Capitalized Interest Letter
Before starting repayment, many borrowers receive a Notice of Unpaid Interest Letter.
The letter specifically says it isn’t a bill… but it really looks like a bill.
Many borrowers worry that not making this payment is a mistake. The unpaid interest is often thousands of dollars after years of school.
The best choice for most borrowers is to ignore this letter and let the interest capitalize.
In an ideal world, recent graduates could write a check for all the student loan interest that accumulated during their college years. However, we don’t live in an ideal world. For the vast majority of borrowers, preventing the interest from capitalizing when entering repayment is unavoidable.
The key in this situation is to focus on the big picture. The capitalized interest letter doesn’t really impact your plan to pay off your student debt in full or pursue forgiveness.
Here again, the critical lesson is not to panic. Getting a notice about thousands of dollars in interest capitalizing certainly sounds bad. While it isn’t ideal, it’s usually unavoidable and doesn’t impact most repayment strategies.
Don’t Make Payments You Can’t Afford
If you are just starting student loan repayment, it isn’t always obvious how student loans will impact your budget… other than the fact they make it worse.
Some borrowers see a bill and instinctively pay it, even if it means dipping into their savings account.
This approach is hazardous with student loans.
Unless you are writing a large check to pay the debt off entirely, dipping into your emergency savings is probably a bad idea.
Even if you can afford the bill for the next three months, what happens when that fourth bill comes? Are you going to be making more money at that time? Will your other bills be smaller?
If you get a bill and can’t see yourself realistically making that same payment for 12 straight months, don’t make the first payment. Call your servicer. Investigate your options.
Thinking one month at a time is dangerous with student loans. It can lead to mistakes and cost more money in the long run.
If you make a payment you can’t afford for three straight months; you are just delaying the inevitable. The only difference is that when the inevitable happens, you have less money in your pocket to weather the storm.
In most cases, borrowers can work with lenders and servicers to find a plan or strategy that works long-term.
Make a Plan for Debt Elimination
There are two paths to debt freedom for federal student loan borrowers: student loan forgiveness and paying the debt off in full.
One route isn’t necessarily better than the other. For example, some borrowers may spend more money chasing forgiveness than they would have if they paid off the loan as quickly as possible — interest is no joke.
If you think one month at a time, you might spend money unnecessarily, opt for a forbearance that is more expensive in the long run, or miss out on a great opportunity to save.
A debt-elimination mindset helps borrowers focus on the bigger picture. It means each monthly payment is carefully calculated to help you achieve your debt freedom goal.
Sherpa Tip: If you are confused about where to start, I’d suggest looking at the federal student loan forgiveness programs. If one of these programs looks like an opportunity to save considerably, start down that path.
If forgiveness isn’t on the table, it’s time to consider the debt elimination order.
Finding the Best Federal Student Loan Repayment Plan
There isn’t one federal repayment plan that works best for all borrowers.
The federal student loan simulator can help borrowers identify the plan with the most affordable monthly payment, but that is only part of the equation.
Your marital status, loan age, balance, and repayment goals can influence which repayment plan is best.
This guide compares the various income-driven repayment plans and helps borrowers decide which program best fits their needs.
Easy Tip: Keep Your Contact Information Updated
I get really annoyed when I log into my bank account or student loan account, and the first thing they do is ask if my email or home address is still the same.
It feels obnoxious and tedious.
In the case of your student loans, it’s necessary. If a bill gets sent to an old address, it isn’t an excuse for missing the payment.
Lenders don’t mind if you are late with a few payments. In fact, some of them like it. They can tack on late fees and extra interest.
Updating your contact information feels like you are doing the lender or servicer a favor. In reality, you are doing yourself a favor.
Ask Your Employer for Help
Does your job require a college degree? Does your employer benefit from that education?
More and more employers are now offering assistance with student loan repayment.
Not all employers can help, and not all are willing to help. However, at a time with rising inflation and a limited workforce, you might be able to make a convincing case that your employer should offer some sort of student loan benefit.
If your company adds a plan, or if your employer already has one in place, be sure to come up with a plan to maximize the assistance for your student loans.
Pick One Loan to Target for Elimination
If forgiveness doesn’t look like it will happen, you want to eliminate the debt as quickly as possible.
The sooner your debt is paid in full, the sooner you stop spending money on interest.
The debt elimination equation gets complicated quickly because many borrowers have multiple student loans, often from multiple lenders.
One common mistake is paying extra on all of your loans whenever possible. It’s a very responsible decision, but it’s also inefficient. Applying those extra payments towards a single loan is the best approach. If you spread out the extra payments, you could waste thousands of dollars.
Where do I start? The most common approach is to knock out the loan with the highest interest rate. I usually advise knocking out the private loans before the federal loans. Some people like to knock out loans with small balances.
This guide should help you identify the best loan to knock out first.
Don’t Make Assumptions About Student Loan Forgiveness
Federal student loan forgiveness is very real, and it is an excellent opportunity for many borrowers.
Those who work in public service can have their loans eliminated after ten years. Alternatively, if you make income-driven payments for 20 years, you can have the remainder of your debt forgiven.
Unquestionably, these are great programs.
However, they are also deeply flawed programs. Many borrowers miss forgiveness because of the fine print or little-known rules.
I’m not suggesting that you shouldn’t pursue forgiveness or that it isn’t worth it. When it works, it’s fantastic.
Instead, the lesson here is not to make assumptions. Don’t assume that you will qualify. Don’t assume that you meet all of the requirements. Investigate. Ask questions.
The path to forgiveness is much easier today than it was ten years ago when this blog first started. There is still work to be done.
You wouldn’t buy a car without researching it or taking a test drive, and you wouldn’t buy a house without walking through it or having it inspected by an expert.
Treat your student loans the same way.
Learn about the programs that you are considering. Read about all of the requirements. Talk to your servicers. Make sure you haven’t missed anything.
You don’t need to be an expert, but you can’t bury your head in the sand and hope for the best.
Tread Carefully with Student Loan Refinancing
Refinancing student loans is a great way to save money on interest.
It is also a permanent change to your student loans.
The risks associated with refinancing private loans are minimal, but the dangers of refinancing federal loans can be considerable.
Refinancing is also big business for lenders. Refinancing is so lucrative that lender SoFi was willing to tarnish its consumer-friendly reputation and filed a lawsuit to end the payment and interest pause.
This means lots of advertising from lenders. They will want to make it look like an easy decision.
Refinancing might work for some borrowers, but it isn’t the best choice for others.
Don’t be Afraid to ask Stupid Questions
There are no stupid questions about student loans.
Momentary embarrassment is nothing compared to the regret of missing out on a great opportunity because you didn’t ask.
Your servicer gets paid to answer your questions. I love answering reader questions because it helps me make this site a better resource.
This site, and many other resources, were created to empower borrowers to manage their student loans. However, that doesn’t mean that student loan management is easy.
If you have doubts or concerns, ask. If nothing else, it will give you some peace of mind and remove a little stress from your life.
What’s Going on with Biden’s Forgiveness Plan?
Last fall, President Biden announced a plan to forgive up to $20,000 per federal student loan borrower.
The issue is currently before the Supreme Court. They will probably rule in June, but it could come earlier.
For now, we wait.
The program might proceed as planned, it could be tweaked, or it might never happen.
If you think you might qualify, it makes planning a bit more complicated. Think about how you will manage your loans if the forgiveness happens, and have a plan for what you will do if it doesn’t.
Don’t Rely on Friends, Family, and Coworkers for Guidance
The people you trust most in your life may have more experience with student loans than you.
Having a conversation to get ideas and suggestions is an excellent decision. However, you shouldn’t rely on that information as a definitive answer.
The people in your life may be well-intentioned, but they could also be mistaken. They may qualify for different programs based on the age of their loans. They may have benefited from a temporary program that no longer exists. They might misremember something.
Learn. Ask. Verify.
Studentaid.gov and federal loan servicers both have received justified criticism about being flawed resources. Servicers are still far from perfect, but they are better than they used to be. Studentaid.gov has become a very helpful resource for borrowers.
If you hear about a a program that might help you, do some research to verify things. A few minutes now could prevent severe disappointment in the future.
Don’t Let Bill Collectors or Politicians Bully You
In the media, student loan borrowers are sometimes vilified as undeserving of help. Some of us see this in social media as well.
Many borrowers can easily ignore the noise. Sadly, it can negatively impact others.
Bill collectors may use this as a strategy to induce borrowers into making payments they can’t afford.
You went to college to get an education. College is really expensive, so you borrowed money to pay for school. Don’t let anyone shame you for that decision. Even if it was a mistake for you, it can’t be undone now.
Repaying student loans is a big enough challenge already. Don’t let outside noise or rhetoric make things even more difficult.
Track Your Payments and Keep Detailed Records
Hopefully, this step isn’t necessary. Keeping records of every student loan payment is tedious.
Sadly, these records could one day be beneficial.
The federal records and student loan servicer records are not always complete. Lost information could mean that it takes longer to get your loans forgiven or that you miss out on forgiveness completely.
Find a way that works best for your purposes. I like to save confirmation emails in a separate folder in my inbox. You might want to print and file them. The important thing is to create a record of your activity.
It might not ever be needed. However, if the day comes when you need this information, you will be glad you have it.
Understand the Difference Between Principal and Interest
Principal is the money that you borrowed to pay for school. Interest is the cost of borrowing that money.
Early on in repayment, a sizable portion of your monthly bill might be applied to interest rather than principal. In some instances, this is an unavoidable reality of life with student loans. In other circumstances, borrowers can find a way to get the money to count towards principal instead of interest.
Lowering principal balances saves borrowers money in the long run. It is the reason paying just $10 per month extra can make a meaningful difference in your quest to eliminate debt.
Keep an Eye on Variable-Rate Loans
It is important to note that the interest rate on your loans when you start repayment isn’t necessarily permanent.
Because we are in a time of inflation and rising interest rates, many borrowers will discover that the interest rates on their loans keep trickling up.
Higher interest rates are obviously bad, but there are a couple of options for borrowers with variable-rate loans. Many borrowers choose to eliminate their variable-rate loans by paying them off first to prevent future interest rate growth. Others take a shortcut and convert their variable-rate loans into fixed-rate student loans.
Bankruptcy Could Mean a Clean Slate
If repayment seems impossible, bankruptcy might be the best path forward. This is especially true for the borrowers who didn’t finish school or have spent years struggling to find a job in their field sufficient to pay their bills.
Bankruptcy is another subject where there is a lot of misinformation floating around. Many claim that a bankruptcy discharge is either impossible or nearly impossible.
These assessments were once reasonably accurate. However, recent changes to bankruptcy procedure now mean that many borrowers may be able to discharge their loans successfully.
Ask for Help Because Nothing is Permanent
I’ve run this website for over a decade. I started it because I was a government lawyer, and I couldn’t get answers to my questions about Public Service Loan Forgiveness.
I’m amazed at how much has changed in that time. Rules change. Programs get created and eliminated.
It causes confusion, but things are trending in the right direction.
We’ve recently seen borrowers with outdated spousal consolidation loans successfully lobby to improve things.
Asking for help isn’t limited to trying to get legislation through Congress. Private lenders occasionally give lenders a break from strict contract terms so that they can keep up with payments.
Likewise, some borrowers have student loans with a cosigner. Your cosigner might be willing to help you through a rough patch if it means you don’t miss a payment. They will also likely appreciate you being upfront about any issue.
Sometimes borrowers share their hardships in the press, which can lead to a positive outcome.
Why do I bring up all of these examples?
Because there is no shame in asking for help. There is no shame in getting creative.
Student loans are really expensive, and you should pursue any option you can to make them more manageable.