I’m sure you have come across the old saying “think before you leap”? If you think about this saying for a while, you may realize it is applicable to many decisions of our life. Obtaining a loan to finance your education is one such decision. So before you obtain a loan, think about the repayment as well. If you do not, you may probably end up being financially distressed, months after your graduation.
Let us know talk about some tips which could be highly useful in repaying your college loans effectively, especially without deteriorating your credit rating.
Make the payments on time
When you start repaying loans the best thing is to make your payments on time. This will improve your credit rating which leads to subsequent interest reductions over the course of repayment. However, it’s easier said than done. Especially if you have taken loans for your accommodation you may find yourself struggling to make the payments on time.
Utilize tax breaks
Do you know that the interest you pay for your student loans is tax deductible? According to the government regulations, you may deduct interest up to $2500 annually provided your annual income is less than $65000.
Get you federal loans waived from government agencies
Not only tax breaks you may have the chance to waive-off at least part of your college loan, applying for jobs on specific areas which are stipulated by the government such as teaching, nursing and so on.
Search for loan repayment plans
The best thing is to research on repayment options before you take a loan. The following are the common repayment plans available in the market.
- Standard or Level Repayment Plan: This is the default repayment plan unless selected otherwise. In general, this scheme requires a constant amount to be repaid over the term of the loan which is 10 years.
- Graduated Repayment Plan: Although the term of the loan is same as Standard Repayment Plan, this option allows you to make smaller payments at the beginning of the repayment period, gradually increasing to larger amounts towards the end. However since you make smaller payment at the beginning, you will end up paying higher amount as interest compared to the previous plan.
- Income Adjusted/Income Sensitive Repayment Plan: This plan is ideal for people who experience continuous fluctuation of their income with time such as self employed graduates. The payments will be lower at the beginning but gradually increasing just as a Graduated Repayment Plan. However the difference is, this method allows payments to be adjusted based on the income of the loan bearer so that he/she will typically pay lesser amounts when the income is low and vice versa. However this added degree of flexibility doesn’t come without a premium price.
- Extended Repayment Plan: This is an alternative repayment plan which allows you a longer repayment term usually 25 to 30 years as opposed to 10 years under the standard plan. However, as the fundamentals of economics explain higher the term of the loan, higher the interest rate. As a result you will end up paying a significant amount of money more than what you would do under previous plans.
Consolidate, if you have many loans
If you have taken several college loans you may consolidate them into one so that you make a single monthly payment. A weighted average interest rate is calculated normally with a cap so that your monthly payment can be lower than the sum of all the individual payments. The advantage is the convenience it brings. On the other hand even if your monthly payment is low you may end of paying more under this scheme at the end of the term. So whether the lower monthly installment can be taken as an advantage is subjective.
Seek to defer the payment in times of economic hardships
If nothing above can resolve your problems you may be experiencing a severe financial crisis. In this case deferring the payments is the only option available to you. However this should be done only when you are totally out of sorts as this can seriously deteriorate your credit rating.