Repaying Private Student Loans

By Mark Kantrowitz

Six months after you graduate or drop below half-time enrollment status, you will have to start repaying your private student loans.

During this 6-month grace period, it is easy to forget about your student loans. You may have moved for a new job. You have a lot of start-up expenses, such as a security deposit on a new apartment, utility deposits, the cost of furnishing an apartment, the cost of business attire, the cost of buying a new car and other miscellaneous expenses.

But, the payments on your loans are due, even if you don't receive a statement or a coupon book. It is your responsibility to tell your lender about any changes in your contact information. The lender will eventually find you, but it may take them a few weeks or even months to trace your current address. You don't want to be late on your very first student loan payment.

Instead, now is the time to figure out what's what with repaying your student loans.

Get Organized

Your first task is to get organized so you don't lose track of any of your loans.

If you've been throwing all the lender mail in Ziploc baggies in your freezer, now is the time to thaw out the correspondence.

• Make a list of all your loans. Include the name of the lender, the lender's web site and phone number, the loan ID number, the loan balance at the start of repayment, the interest rate, the monthly payment amount, the repayment plan and the date the first loan payment is due.
• Label a file folder with the lender's name and loan id numbers. Keep copies of all correspondence with the lender in this folder.
• Tell your lenders about your current contact information, including telephone number, email address and postal address.
• Put a reminder in your calendar two weeks before the first payment is due on each loan. If you don't receive a statement or coupon book by then, call the lender to find out where to send the payment and to verify the payment amount.

What If You Lost Your Loans?

What do you mean, you lost your loans? How could you forget about something so important? Actually, this is not all that uncommon.

If you don't remember who all your lenders are, call your college's financial aid office to ask them if they have a list of all your student loans. Chances are, they do, at least of the loans that required school certification. They can provide you with the name of the lender and the amounts borrowed, as well as the lender's contact information. You can then call the lender to ask for help.

You can also get information about your federal student loans at StudentLoans.gov. For private student loans, get copies of all three of your credit reports for free at annualcreditreport.com. Your private student loans should show up on at least one of your credit reports.

Consider Student Loan Consolidation

Consolidating student loans replaces multiple loans with a single loan. This can streamline and simplify repayment by giving you just one monthly payment instead of several.

But, consolidation isn't always the best option. If one of your loans has a much higher interest rate than the others, and you are capable of making extra payments on your loans, you can save money by making extra payments on the highest-rate loan. There are no prepayment penalties on federal and private student loans. If you consolidate your loans, however, you will no longer be able to target the loan with the highest interest rate for quicker repayment.

When accelerating repayment of the loan with the highest interest rate, make the extra payment a day or two after your regular payment, to reduce opportunities for confusion. Include a cover letter with the extra payment that specifies the loan id number of the loan with the highest interest rate. Tell the lender that you want this extra payment applied to the principal balance of that loan. Tell them to not treat the extra payment as an early payment of the next installment, as you don't want them to skip the next payment's due date.

Refinancing private student loans might yield a lower interest rate, but only if your credit scores have improved significantly. You must not only beat your previous best credit score, but also the credit score of your cosigner. It usually takes a few years of paying all your bills (not just the student loans) in-full and on-time for you to get good enough of a credit score to qualify for a better interest rate.

Choosing a Repayment Plan

Choose the repayment plan with the highest monthly payment you can afford. This will pay off the debt faster than options with lower loan payments and save more interest over the life of the loan. Increasing the monthly loan payment increases your progress in paying off the loan balance.

Dealing with Financial Difficulty

If you run into financial problems, talk to your lender to ask about your options. You will have more options before you default, than afterward. Student loans are almost impossible to discharge in bankruptcy, so ignoring the problem will not make it go away.

The consequences of default are so severe and permanent that you should do whatever you can to avoid defaulting on your student loans. Not only will defaulting on a private student loan ruin your credit, but your cosigner's credit as well. The lender will seek repayment from your cosigner and add collection charges to your loan balance. The lender can refer your loan to a collections agency and can sue you in court. A court judgment against you will let the lender garnish up to 25% of your wages, place levies on your bank accounts and record liens against your property.

If your financial difficulty is short-term, such as unemployment or medical/maternity leave, most lenders offer deferments and forbearances. These suspend the obligation to make payments on the loans. Interest will continue to accrue, and if unpaid, will be added to the loan balance. This is called interest capitalization. To avoid capitalization, ask about a partial forbearance, where you will make interest-only payments for a limited time instead of suspending the loan payments completely.

If your financial difficulty is long-term, such as your job doesn't pay well enough to make your loan payments affordable, look into alternate repayment plans. Alternate repayment plans include extended repayment, graduated repayment and income-driven repayment. (Most private student loans do not offer income-driven repayment.) These repayment plans reduce the monthly payment by increasing the term of the loan.

Also, look for ways to increase income and decrease expenses. Ask your boss for a raise. Or work evenings and weekends at a second job to earn more money to pay down your student loans. (An added benefit: You'll have less time available to spend money.) Cut costs by substituting free and low-cost items for more expensive items. For example, drop your gym membership and get your exercise by walking around the block. Read books borrowed from the public library. Get a roommate to split the rent, or move back in with your parents. Sell your expensive car and get a less expensive car or use public transportation. Sell any belongings that haven't been used in a year on eBay or Craigslist or have a garage sale.

Other Repayment Tips

Sign up for auto-debit and electronic billing on your student loans. Not only will you be less likely to be late with a payment, but many lenders give a slight interest rate reduction — typically, a quarter or half a percentage point — as an incentive. It saves the lender money, so they pass on the savings to you.

Claim the student loan interest deduction on your federal income tax return.