Most college students are too busy cramming for tests and churning out papers to think about dealing with debt. But while it’s wise to focus on school, chances are you’ve overlooked some key facts about your student loans.
Boning up on how your student loans work — and when you’ll have to begin repaying them — requires research and time. No one’s going to do it for you, so you’ll need to carve out time to make calls, attend an exit interview and organize your budget. No matter how much debt you’ve taken on, you want to understand your loan so there aren’t any surprises later on.
Here’s what every student loan borrower should know before graduation.
1. When You’ll Have to Start Making Payments
Like it or not, graduates are responsible for contacting their lender to find out this info. In most cases, student loan payments kick in six months after graduation, when a student’s attendance has dropped below half-time or he’s quit school. But you may not have as much time as you think.
For example, the repayment period for federal Direct PLUS loans starts the day after the final disbursement is made, and private student loans can have varying grace periods.
2. The Different Repayment Options
Once students graduate, they’re automatically enrolled in the standard repayment plan. But that doesn’t mean it’s the right plan for you.
If you expect your income to increase over time, the Graduated Plan, where monthly payments start low then increase after two years, may be the best fit. An income-based plan, where monthly payments are based on how much you earn, is another option. Make sure to research them all.
3. When Interest Kicks In
An interest loan, which sometimes is fixed and sometimes is variable, is tacked onto your loan automatically. If it’s a variable-interest loan, your interest is subject to change over time. If you have a fixed-interest rate, it will remain the same.
Remember, interest accrues the second you take out the loan, so it may be worth your time and effort to begin making payments while you’re still in school.
4. How Debt Impacts Your Credit Score
It’s hard to view a loan as anything but a burden, especially when it’s eating away at your budget. But try to view your student loans as an opportunity to strengthen your payment history — especially since they could bolster your credit score.
Making on-time monthly payments during the student loan repayment process is a great asset to have on a credit report. So make that spotless payment history the goal, since the last thing you want is to default on the loan.
5. The Impact of Late or Missed Payments
Making late payments on your student loans is a fast-track to tanking your score. (You can see how your student loans are affecting your credit by checking your two free credit scores, updated monthly, on Credit.com.)
If you’re the forgetful type, consider automating your payments. Most loan servicers, be they federal or private, offer some sort of system that’ll allow you to set and forget your payments. Just make sure to adjust your budget for the deduction and keep enough money in your account to cover the cost.
You can see more tips for soon-to-be graduates on Credit.com.