With your new degree in hand, you’re excited about what the future holds — but a little worried about the student loan debt you racked up in school. You’re not alone: The Federal Reserve Bank of New York1 reports that more than 37 million people in the United States each hold an average of more than $24,000 in student loan debt. Plus, you have some time between tossing your cap in the air at commencement and making that first payment — usually about six months. Here are seven steps that can help you use that grace period wisely so you’re well-prepared to tackle those loan payments.
1. Make a list
Having student loans with several lenders can leave your mailbox stuffed with statements every month, and keeping track of all those due dates can be a hassle. Get organized by making a list of your loans, the total amount owed and the monthly payments due. As you make your list, check that the amounts recorded in the National Student Loan Data System match your records. Add any state, institutional or private loans that are not recorded in the federal loan database. If you moved into a new apartment — or just moved out of Mom and Dad’s basement — update your address with your loan servicers.
2. Create a budget
The difference between your dream job’s gross salary and take-home pay can be disappointing. Deductions taken from your pay check, such as taxes, health benefits and your retirement contributions, take a bite out of the money you have to pay your bills. Understand how much money you really have for new work clothes and dinners out with friends by listing your monthly expenses and payments due and subtracting them from your net pay. This is your discretionary income — the amount left over for fun after rent, utilities, groceries, loan payments and your other essentials have been paid.
Federal student loans: Loans funded by the federal government that generally have fixed interest rates, grace periods, and repayment concessions, such as deferment or forbearance for borrowers who meet specific criteria. They include Perkins Loans, PLUS Loans, and Stafford Loans.
State student loans: Partnerships between states and private loan servicers or other programs that provide student loans to students within that state.
Institutional loans: Loans offered to students of a specific institution, often in partnership with a private loan servicer.
Consolidation loans: Borrowers with multiple loans may use this tool to combine them into one.
Private loans: Loans offered directly to students from a bank or other financial institution.
3. Save for a rainy day
Treat your savings like any other bill, socking away a little every month. Building an emergency fund equivalent to three to six months of expenses will give you peace of mind — and the cash you need when you suddenly have an unexpected expense. Even if you aren’t able to put away six months of expenses in your emergency fund, don’t be discouraged. Saving something is better than nothing.
4. Tackle high-interest debt first
Many students use plastic when cash is tight, so you may have credit card debt. High-interest-rate debt can grow quickly, so you’re saving money each time you pay off some of the principal balance. You can do that by paying more than the minimum amount due each month. Once the debt with the highest interest rate is paid off, start working on the second highest, and so on.
5. Take due dates seriously
Late payments may be reported negatively on your credit report, reducing your credit score and making it tougher and more expensive to get other credit like car loans and a mortgage. A bad credit score can even make it more difficult to get a job, since many potential employers check your credit profile as a measure of responsibility. If you have loans from several sources and are concerned about keeping track of them, consider a consolidation loan, which combines all of the loans into one monthly payment. While one payment is easier to manage, your first consolidation loan payment might be due earlier than the end of your six-month grace period.
6. Pay early
Paying student loan debt early is all gain, no pain. With no prepayment penalties and the opportunity to reduce the typical 10-year repayment terms, consider making early payments if you have some extra cash during the grace period.
7. Be prepared for setbacks
Student loans are serious business. With few exceptions, they cannot be cancelled or forgiven, even through bankruptcy proceedings. If you’re late or delinquent on paying them back, Uncle Sam may seize tax refunds or other assets to help satisfy the debt, while collection costs will be added to the loan balance. If your circumstances change — unemployment, illness or other events that make it impossible to pay back your loans — contact your loan servicer immediately to discuss your options. While it’s generally not possible to extend the grace period, your lender may have options like forbearance and deferment, which postpone your obligation to pay your debt for a specific period of time. Your loan servicer may also be able to modify your repayment plan based on your income or other factors. The sooner you make the loan servicer aware of your circumstances, the sooner you can resolve the situation.
By being smart, strategic and savings-savvy, you can use your grace period to get your finances in order before your first student loan payment is due. Developing good financial habits now, including budgeting, making timely payments and saving a portion of your income, will give you an advantage later on the road to financial well-being.
This material is for informational purposes only and the statements represent TIAA-CREF's interpretation of applicable law. It is presented with the understanding that TIAA-CREF (or its affiliates, distributors, employees, representatives and/or insurance agents) is not engaged in rendering legal or tax advice.