All good things must come to an end. After delay after delay, we still aren’t sure when student loan repayments will start back up again, but they probably will eventually. Although the world is starting to turn back to a “pre-Covid-19 normal”, many challenges will remain, particularly those that existed before Covid-19. This is especially true for loan repayments. For decades before Covid-19, millions of people had to repay student loans and would struggle for a variety of reasons. Some of these problems with repayment can be avoided. Fortunately, regardless of whether someone is making payments for the first time, or has made dozens of payments, it is never too late to learn how to avoid mistakes on repayments.
To start, you should make sure you have an organized plan for making your loan payments. You should first find a way to always be reminded of when payments are due. This can be as easy as marking it on a physical calendar or having a digital calendar alert. It is a good idea to have a reminder a week ahead of time because if you have the reminder only set the day that the payment is due, and you are busy that day, you could forget about it and have to suffer a penalty. A late payment can cost you more due a penalty fee. It can also negatively impact your credit score.
Another way to keep organized to sign up for automatic payments. This will allow the loan servicer to draw the money from your bank account automatically by the due date. As a result you will not be late in your payments. Additionally, many lenders will reduce your interest rate by up to .5%. If you employ this option, you should make sure you have enough money in the bank account it is drawing from. Obviously this is something you will have to keep track of, but it can sometimes be harder to keep track when you are not making the payments yourself.
Regardless of whether you use automatic payments, you should make sure to budget to have enough money to make the loan payments each month. This is easier said than done, but it is essential because the consequences of not making payment are grave. Some people go as far as to budget every cost, such as entertainment, groceries, utilities, rent, among others. If you can set up multiple bank accounts, you can have one dedicated to loan payments. If your salary is big enough, you can have some of your direct payment go to the account that you will make loan payments from. If you can couple that with automatic payments, then you can stay organized without even thinking about it.
Outside of being organized in terms of payments, you also need to keep track of any messages that you receive from your loan servicer. Although it can feel like junk mail because the letters or emails are often repetitive, you never know what new information might come through, especially when there has been a two-year gap in payments.
Provide the correct information
The last two years have changed for just about everyone. Many people have changed jobs, where they live, and plethora of personal finance factors in their life. As a result it is important to ensure all information is up to date on your loan repayment account. So if you changed where you live, or any other contact information, make sure the loan company has this new information. Often this is as easy as logging into the online interface and updating the relevant information. Sometimes you will have to actually call the loan company.
Similarly, for one reason or another, you might have switched banks, or may have a new account you are depositing most of your money to. If this occurred, it is crucial that you update this information so the payments will be completed.
Make the right choices on refinancing
Maybe your income has changed in the past two years while you weren’t making payments. Perhaps you were in a public interest job and are now at a firm, or vice versa. For the time being, in particular while interest rates are still low, it is potentially worth refinancing. However, you should make sure you choose a refinancing plan that works best for you. If you are making a lot more money, you might want to enroll in a plan with a lower interest rate that has you make larger payments on an accelerated timeline. This will save you money in interest. But you should make sure you do not choose a plan that stretches you too thin, because even if you can make the payments now, a future incident could disrupt that.
Alternatively if you lost your job, took a lower paying job, or had some financial albatross that remains, you might be considering refinancing to have lower monthly payments. However, you should really consider whether this is necessary. It can be hard to make new monthly payments on a lower salary, but the longer you take to pay it off, the more interest you will have to pay. Additionally, many of your future plans such as setting up a college fund or buying a house could be tied up in loan payments.
Just as it is important to budget, it is crucial to plan ahead. If you have not resumed making payments yet, you should start setting aside money. You have gone two years without needing to make those payments. Even if you have not lived beyond your means with the loan repayments accounted for, there is still a difference between just setting aside the money and actually having to turn it in. While it can be hard, you should try to have a rainy day fund on top of your repayments, so you do not risk defaulting at any point. If you are planning on switching jobs, are buying a new place, or have a kid on the way, you should account for that in your financial planning.
No matter when you pay off your loans, ultimately the goal for most people is get rid of them to have full financial independence. As you seek to get to this point, there are additional strategies you should consider to improve your financial situation. A financial advisor could help you balance various monetary factors in your life. You might also want to develop an investing plan. Gaining more money from investing not only could provide you more money to pay off your loans, it can also help take care of other financial concerns. Finally, you should look at additional tactics to pay off your student loans.
It is never fun to pay student loans, and having to restart them when so much of the world is still in turmoil might make them even more stressful than before. But if you approach them with a clear head and avoid the common pitfalls, you will be fine.
Todd Carney is a graduate of Harvard Law School. He holds a Bachelor’s degree in Political Science and Public Communications. He has also worked in digital media in New York City and Washington D.C. The views in his pieces are his alone and do not reflect the views of his employer.