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How to Pay Less on Student Loans

By: Investor Solutions

By: Investor Solutions

College can be a big investment. For many of you reading this, you’ve long since paid off your loans. Still, I’m sure you know a family member or friend that is about to graduate or embark on the path of enlightenment. If so, pass this on, it may help. And for those of you who this directly pertains to, you’d be wise to closely monitor those loans. The payments can sneak up on you and balloon if you’re not aware of your options.

Many schools require online quizzes in order to educate students on the different aspects of student loans, but students can quickly skip through these annoying obstacles without actually reading, let alone learning a thing. Even though I’ve kept a close eye on my loans, I received a sticker shock of my own. In my case, once I graduated with my MBA, I was immediately required to begin paying some of my loans. The minimum monthly payment started out at around $300. Once the grace period ended though, if I hadn’t done anything, those payments would’ve increased to $1,300/month. Even though I knew my grace period was over soon, when I saw that future payment due, I was shocked. If I was someone unaware, I may have logged in one day looking to pay my minimum amount only to find that I couldn’t come anywhere close to affording it. By then, there’s not enough time to do anything about it. So I suggest a couple of things to anyone entering college or about to graduate.

Sallie Mae has a great, free tool that allows you to project the cost of your education and the amount of loans you’ll need to apply for. With this investment planner they can help you compare different schools and forecast your future monthly principle and interest payments. You can find this tool on their homepage www.salliemae.com or at https://plan.salliemae.com/Plan.aspx. Let’s take a look at an example. I went through the program and created a plan. At the end you can save the plan and its results in order to compare it to another plan based on a different school or different loan amount. The first step to creating the plan is to fill out the student information. This includes the student’s year in school, degree they are pursuing and state of residence. Continuing on to the next step you need to select your desired school, enrollment status, start date and number of years you plan to attend. My example uses a Chicago school that I’ll hypothetically attend for a two year MBA. Now you must tell the program how you are going to pay for school. Will there be personal contributions (by the student and/or parent), scholarships, federal loans or private loans? I’m going to have federal loans pay my entire way. The program automatically takes into account inflation. For the results of my example, see the graph and table below. And yes, I did pick a very expensive school. I hope yours doesn’t cost this much. Completing the planner will bring you to the final tab. Tab 4 will lay out two tips (or options) that will help you manage your loans. The best tip that I can give you to help reduce your loans is to make in-school, interest-only payments. These payments are relatively low, maybe $100/month depending on the size of your loan. However, the savings that you gain by doing so are enormous. Based on my plan, if I were to make in-school payments of $98/month in the first year and then $200/month in the second, I would save roughly $17,500 over the life of my loans. They will also reduce the monthly, post-graduation payments that will have to be made.

In-school, interest-only payments coupled with another strategy, consolidating your loans with a federal direct consolidation loan, can drastically reduce your monthly payments and eliminate the shock you’ll experience once your grace period is over. With this tool, you will be able to consolidate all your eligible loans into one loan with a weighted average interest rate based on each loan’s size. Once you have consolidated your various loans into one large loan, you will only have to make one minimum monthly payment. The minimum payment on one large loan will be much lower than payments on five smaller loans. In my case, I was able to lower the payments back down to about $400/month. You can start your consolidation process by visiting the federal student aid site at http://www.loanconsolidation.ed.gov/. Click on “Borrower Services” and follow the directions they lay out for you.

Of course, there are other ways to lower your post-graduation payments. You can enroll in an extended payoff program with your lender or even ask for a deferment. Even better, you could never graduate. Stay in school as long as you can, keep the grace period rolling over. I actually know some people who I think are trying to do this. Nevertheless, if you want to join the real world at some point, these are two great strategies that I recommend to lower your burden. By making interest-only payments on your loans while in school, you can dramatically lower the total amount over the life of your loans, and decrease your overall student loan monthly payment after graduation. Consolidating your loans can lower your monthly payment even more and if you consolidate at an ideal time, you may even lower your interest rate.