By Ben Luthi
For many college students, it’s tempting to ignore their student loan debt until the payments come due. If you’re not careful, though, that approach can set you up for years of difficulty and attempts to catch up.
To manage student loan debt successfully, it’s important to start before you even request financial aid. With few high schools offering financial literacy and colleges and universities providing little to no student loan counseling, taking the time to learn how to use student debt wisely is essential.
See our related article about how student loans affect your credit score.
In the last five years, the cost of higher education tuition in the U.S. alone has increased by 8.3%, and the total cost to attend school has outpaced inflation by 112% during that same time, according to a recent survey by Self. (See our research about the rising cost of college.)
While there’s nothing college students can do about rising education costs, it’s a good idea to think about ways you can approach and consider using student loan debt from the start.
To qualify for federal student loans, you need to fill out the Free Application for Federal Student Aid (FAFSA). It’s through this form that your school’s financial aid office determines what type of student loans — for undergraduates, it’s specifically whether or not the federal government will subsidize your interest while you’re in school — and how much you qualify for.
But just because you’re eligible for a certain amount based on their calculations, it doesn’t mean you have to accept it all. Here are some things to do to make sure you don’t borrow more than you need.
It can be hard to know what you’re going to spend over the next term, but getting a basic idea can help you determine how much money you need to pay for tuition, supplies, room and board and other necessary living expenses.
While you want to limit your student loan debt, avoid restricting yourself so much that you’re skipping meals or struggling to make rent. Also, consider adding a buffer of at least a few hundred dollars in case of an emergency.
Your school may offer various scholarships and grants to students who apply based on academic merit or other achievements. Whether or not you qualify for any of them, it’s important to maximize the amount of free money you can get your hands on.
Websites like Scholarships.com and Fastweb have databases with millions of scholarship opportunities from private companies and organizations. While you may not be eligible for all of them, there may be enough you do qualify for that you can reduce how much you need to borrow.
“Make sure you fill out the FAFSA to ensure you’re considered for grants and scholarships that can lower your education costs,” says Kat Tretina, a certified student loan counselor.
Getting a job in college may not sound like any student’s idea of fun, especially if you have a full course load and a budding social life. But even if you only work part-time, the money you earn can add up over the years you’re in school, saving you potentially thousands of dollars in student loan debt. (Some of our side hustle ideas might work for you.)
If you go this route, just be sure you have a plan for using the money you earn wisely. There’s nothing wrong with having fun, but it’s also a good idea to set aside a good amount to help pay your education expenses.
There are two types of student loans: federal and private. The former describes loans provided by the U.S. Department of Education, and the latter describes loans originated by private lenders, such as banks, credit unions and other financial institutions.
For undergraduate students, federal loans are virtually always the best choice. Not only do they charge relatively low interest rates, but they also don’t require a credit check to get approved and they provide access to certain benefits, including income-driven repayment plans and loan forgiveness programs.
For graduate students and parents looking to help their kids, it may be wise to compare what the Department of Education has to offer. Not only do graduate and parent loans have higher interest rates, but they also charge relatively high loan fees. Someone who’s more established financially may not need income-driven repayment options or loan forgiveness after their master’s degree.
If you’re considering private student loans, be sure to compare at least three to five lenders, including the Department of Education. There’s no single loan out there that’s best for everyone, but the right research can help you find the best fit for your situation.
A bachelor’s degree can be a valuable asset, depending on the direction you want your career to take, but it’s not always necessary. If you’re already feeling overwhelmed with student debt, you may be considering whether to quit and avoid making things worse.
The decision may be worth considering if you have a clear path back to college or you plan to attend a less expensive vocational school instead. But if you already have student loan debt, those payments will come due six months after you leave school, and if the job you take on doesn’t pay well, your monthly student loan payments could make it difficult to get by.
Also, dropping out could make it difficult to get a job in some industries. So depending on where you want to start in your career, it may be better to stay in school, even if you’ll be on the hook for more debt by the time you graduate.
After you graduate from school (or drop below half-time), your monthly student loan payments typically come due after a six-month grace period. Avoid waiting until that period ends, however, to start making a plan.
“If you don’t have a plan for managing and repaying your loans in place, your debt can quickly spiral out of control,” says Tretina. “Interest rates can cause your loan balance to grow by thousands of dollars, and it can take 10, 15, and even 20 years to pay them off.”
As soon as you finish school, log into your online account with your servicer to see what your monthly payments are going to be. Then take a look at what your monthly income will be from your new job to determine whether the payments will be affordable.
If you think you’ll have a tough time and you have federal loans, consider applying for one of the four income-driven repayment plans available. Each of these plans bases your monthly payment on a percentage of your discretionary income, which is determined by your annual income and the poverty guideline for your state and family size.
In addition to lowering your monthly payment, these plans also stretch out your repayment period from the standard 10-year plan to up to 25 years. While this can make your payments more affordable, you will end up paying more in interest in the long run.
In general, it feels better to have no monthly payments at all than to have something you’re obligated to pay over time. But in certain circumstances, it may be worth making just the minimum payments:
Only you know what’s best for you. So take a look at your financial situation and your other goals to decide what’s the best course of action.
If you do believe that paying down your debt faster is the best option, try to focus your extra payments on the loans with the lowest balance or the highest interest rate first — depending on whether you want to eliminate smaller debts first or save a little more money on interest.
Once you’ve paid off the first loan, roll the payments you were making on it into the next loan until it’s paid off, and so forth. This method gives your repayment a snowball effect and can help you eliminate your debt much faster than originally planned.
Refinancing student loans involves paying off your current ones with a new loan from a private lender. In some cases, refinancing can help you score a lower interest rate or get more flexibility with your repayment terms and monthly payment.
That said, you typically need a strong income and credit history — or a cosigner with both — to qualify. And even if you do get approved, there’s no guarantee you’ll get an interest rate lower than what you’re currently paying.
Finally, private lenders don’t offer the same benefits as the Department of Education, so refinancing would eliminate your access to income-driven repayment plans, loan forgiveness programs, generous forbearance and deferment policies and more.
As you consider whether refinancing is right for you, think about both the benefits and drawbacks, as well as your own situation, to determine the best path forward.
If you’re really struggling with making your student loan payments, it might be tempting to stop paying them altogether. With other types of loans, it’s possible to include the debt in a bankruptcy or to negotiate a settlement for less than what you owe.
But that’s not how it works with student loans. If you default on federal loans, for instance, your payment comes due immediately, and you may also be on the hook for collection charges, which can add up to 25% more than the amount you owe.
“They can garnish your wages, seize your tax refund, and even take some of your Social Security benefits,” says Tretina.
And while it’s possible to settle your student loan debt, the options don’t provide a lot in terms of savings.
It’s technically possible to include federal and private student loans in a bankruptcy, but it’s extremely difficult and very few cases are approved. Finally, missing payments or defaulting on student loan debt can wreck your credit, making it difficult to get approved for financing in the future, among other things.
As such, ignoring your student loans will create a lot more problems than solutions.
“Contact your lender if you can’t afford your payments,” Tretina says. “You may be eligible for loan deferment or forbearance, where you can temporarily postpone making payments while you get back on your feet.”
Regardless of how you choose to manage your student loan debt, it’s important to focus on building your credit history. Not only will a strong credit history make it easier to get approved for other types of credit at favorable rates, but it can also help you with your student loan debt.
For example, if you have private loans with a cosigner, you may be able to request that your lender release the cosigner, making you the only borrower on your loans — just keep in mind that not all private lenders allow this.
Also, building an excellent credit history can potentially help you score a refinance loan without the help of a cosigner, potentially saving you money on interest.
As you open credit accounts, use them responsibly and pay your bills on time, your credit history will improve and open up even more opportunities in your future.
Ben Luthi is a personal finance writer who has a degree in finance and was previously a staff writer for NerdWallet and Student Loan Hero.