How to pay off undergraduate loans as a graduate student

[maelia8]

I'm starting my second year of graduate school, fully funded and not incurring any new grad debt. However, there is the matter of my undergraduate student loans, which have been deferred almost constantly since I completed undergrad three years ago due to various fellowships and academic research and teaching appointments.

 

My loans are all federal government student loans and all are subsidized (except one), so the interest rates are quite low, and the grand total is not too big (less than $20,000). I'll be in grad school for at least another five years, and I want to at least start working on paying off my undergraduate loans during this time.

 

Does anyone have experience with this? What sort of timeline did you set for yourself, and how much did you manage to pay off while still a grad student? Any strategies for keeping to a payment schedule? 

[farflung]

Hi! I was in a very similar situation to you when I started grad school four years ago -- similar amount of debt (although most of my loans were subsidized), and a desire to start paying so that I didn't accrue interest well into my mid-30's.

 

I will assume your stipend allows you to meet basic costs of living and perhaps even have a small emergency fund. If that's the case, I encourage starting to repay -- I'm so glad I have the past few years! I make a monthly payment of around $300, which disperses across my federal loans. Loan servicers generally consolidate all student loans into a single monthly payment.

 

Once you begin repaying loans, you can (and should) set up a monthly automatic payment, which deducts directly from your bank account. Do this. Don't ever think of that $300 (or whatever your payment amount is) as part of your negotiable monthly budget -- the money is just not yours. I believe you can often choose your monthly payment date, so you might consider having them draw your loan payment from your account a day or two after your paycheck comes, so you only see the money in your account for a day or two before it disappears. You could also open a checking account specifically for loan payments, and just always make sure you have your monthly payment in there ready to go. My loan servicer (Mohela) notifies me a few days in advance of drawing a payment, and notifies me when they've taken it as well. 

 

First step -- contact your loan servicer and try to talk to someone about entering repayment. What would it look like? How much would your monthly payment be? 

 

I still don't have a target date for repaying all of my loans-- I assume that's a decade or more off. I know I've paid down a few thousand during grad school though, so definitely made a dent. Perhaps one day I'll have a 'real' job and be able to make larger payments, but I'm fine with humming along!

Edited July 21, 2015 by farflung

[maelia8]

Also: are there rules/conditions to making payments while in deferment? I want to make payments semi-regularly, but want to keep the loans in deferral so I don't have to pay if things get tight suddenly and I need to stop for a few months. 

[kyjin]

What I've done is picked one loan at a time (unsubsidized with the highest interest) and start paying that each month when I'm able. Some months (example: summer when I have less money) I may skip a payment or do a lower amount, but since you're deferred, you can pay as much or as little as you'd like whenever you want. If you think you can afford to do this regularly, I agree with farflung that a scheduled payment may be up your alley. I've already paid off one of my smaller loans and am currently working on my last two unsubsidized loans (I won't worry about the subsidized loans till later), so hopefully by the time I'm done grad school I will have lower monthly payments overall. 

 

And don't worry; paying your loans should not take them out of deferral.  

[avflinsch]

My situation is a bit different, I took loans for the first 2 years of undergrad, and then dropped out. I kept taking courses afterwards to reset the clock on repayments - the rules have since changed and the clock does not reset every time you enroll. I ended up paying back loans while I was no longer going to school, and eventually finished my undergrad (using employee benefits) 30+ years later. I am now in a grad program (still using employee benefits), so my education financial responsibilities are minimal.

Instead of trying to ay back the loans while in grad school and on a limited income, I would set up an account and place any spare funds into it while in school. Once you start on a professional or academic career, you will have a cash reserve and can start paying the loan from that. I would setup auto transfers into and out of the reserve account.

[rising_star]

Instead of trying to ay back the loans while in grad school and on a limited income, I would set up an account and place any spare funds into it while in school. Once you start on a professional or academic career, you will have a cash reserve and can start paying the loan from that. I would setup auto transfers into and out of the reserve account.

 

This is very similar to what I would advise. I would put the money aside in a savings account that you do not touch for now. I say this because previously, when living on a grad student income, there were sometimes unexpected expenses that having that additional cash buffer for was helpful (as in, relatives get sick and pass away across the country and you want to go home to see them before they die and again for the funeral) without having to worry about rent money or other things.

 

That said, I would then use that saved money to make a lump sum once the grace period is up on your loans. That is, if you were setting aside $100/month for 2 years, I would make a lump sum payment of $2400 (plus whatever interest you may have earned) on the loan with the highest interest rate. That payment will go to principal, rather than interest, saving months off your repayment schedule and saving you a good chunk of money in interest. (I know some people might chime in to say that you can deduct the interest paid on student loans on your taxes but this is only helpful if you're paying a significant amount of interest. You may not be, especially not right after you graduate if your grace period takes up half of that tax year.)

 

Your forward-thinking approach is a wise one! Back in the days of higher savings account interest rates, I set aside like $50/month for student loan repayment and, for a while, was earning 4-5% interest on that money. I did exactly what I advise above, making one big payment and then like 4-5 months of additional overpayments to pay off one loan entirely within 9 months of graduating.

[juilletmercredi]

^ I came to say the same thing as rising_star and avflinch. Money is often tight in graduate school, and the small stipends don't leave a lot of room for unexpected expenses and emergencies. I set aside money every month for those things - there was always something. In addition to what rising_star says ahead, there's also reimbursable expenses for school - like maybe your program will pay you to present at a conference, but they'll only reimburse you, and you have to pay out of pocket at first. A lot of people put that on a credit card, but I couldn't get credit cards in the beginning of graduate school so having a little reserve of money was goo for that.

[Tübingen]

I currently have three private loans and three federal loans. All are in deferment. I'm working a second job this year and am saving all the money then doing one large payment at the end of the school year (thus making sure I have enough savings for the summer). My question is, should I put it towards the newest private loan, which I am paying the monthly interest on while in deferment, and thus lower the regular monthly interest payment, or should I put it towards my oldest loan, which also has the lowest interest rate, but is accumulating interest? I'm ignoring the federal loans for now because those I can at least do income based repayment when I graduate, unlike my private ones. 

[TakeruK]

I currently have three private loans and three federal loans. All are in deferment. I'm working a second job this year and am saving all the money then doing one large payment at the end of the school year (thus making sure I have enough savings for the summer). My question is, should I put it towards the newest private loan, which I am paying the monthly interest on while in deferment, and thus lower the regular monthly interest payment, or should I put it towards my oldest loan, which also has the lowest interest rate, but is accumulating interest? I'm ignoring the federal loans for now because those I can at least do income based repayment when I graduate, unlike my private ones. 

 

Assuming that everyone else is equal between the two choices you have (i.e. no special terms that affect your amount owed in the future, like changing interest rates), I would just compute how much interest you would save on either loan repayment option and do what saves you more money! There are loan calculators online and perhaps financial advisors can help you. At my current school, part of our grad student benefits package include free financial advisor meetings with TIAA-CREF, the investment company that is partnered with my school. But many banks will also offer similar free services if you have certain accounts with them.

[Tübingen]

Thanks! I'll look into this! The prospect of paying off an entire loan is fairly enticing, but also not having to do such a high monthly interest payment compared to my other two private loan payments is also appealing. 

[scarvesandcardigans]

Also: are there rules/conditions to making payments while in deferment? I want to make payments semi-regularly, but want to keep the loans in deferral so I don't have to pay if things get tight suddenly and I need to stop for a few months. 

 

I don't believe that payments on your loans while in deferment will bring them out. I would double-check with your loan servicer, though, because each is different.

 

In addition to what farflung said, I would contact my loan servicer to see if there are any advantage programs. For example, my loan servicer (Navient) credits back a certain percent of my principal balance on one loan if I make the monthly payment on time. This is only for a fixed number of months, but it helps. 

[desp1]

It can be done, if you are really super-super frugal, and if your stipend is reasonably generous. I have never had student loans but I have managed to save about $37k, not counting any family contributions, and while paying all my bills. If I can save $37,000 in grad school with no debt, I'm sure if I had had $20k in debt, it would have been destroyed by now.

 

But the catch is, you REALLY have to make sacrifices (no car, shared housing, don't eat out/travel much), and of course your stipend has to be decent. If you're stuck making $16k/year, it won't happen.

[maelia8]

I've been able to save a little bit this year (about $5k, 2k of which I put in my retirement account) and I was proud of that, but your numbers blow me out of the water! My stipend isn't big enough to save much more than that (I live in an extremely expensive area where 65-70% of my monthly budget goes towards rent and utilities). I don't travel except to drive home every few months (I'm lucky that my family lives close enough for me to drive), but I freely admit that I spend a bit more on food than I should (mostly because I'm picky about high-quality groceries). 

[desp1]

I've been able to save a little bit this year (about $5k, 2k of which I put in my retirement account) and I was proud of that, but your numbers blow me out of the water! My stipend isn't big enough to save much more than that (I live in an extremely expensive area where 65-70% of my monthly budget goes towards rent and utilities). I don't travel except to drive home every few months (I'm lucky that my family lives close enough for me to drive), but I freely admit that I spend a bit more on food than I should (mostly because I'm picky about high-quality groceries). 

Sounds to me like at the least you can pay the interest on your loans, so that even if you don't chip away on the principal, you'll graduate with only $20k in debt. And even small payments toward the principal will make that number smaller still. Don't set an impossible goal for yourself....but keep up the great work and it's wonderful you are contributing toward retirement!

[Tübingen]

Sounds to me like at the least you can pay the interest on your loans, so that even if you don't chip away on the principal, you'll graduate with only $20k in debt. And even small payments toward the principal will make that number smaller still. Don't set an impossible goal for yourself....but keep up the great work and it's wonderful you are contributing toward retirement!

 

ncole1 is spot on about setting reasonable goals as it really depends on how much your interest is. Mine is $115/month for one loan. Multiply that by 3 loans and that is my grocery bill for three months! On a small stipend, it could be impossible to set that much aside, so don't feel bad if you can't. I'm only going to able to pay a little extra on my loans because I took on a second job.

 

 

 

[lewin]

Does anyone have experience with this? What sort of timeline did you set for yourself, and how much did you manage to pay off while still a grad student? Any strategies for keeping to a payment schedule? 

 

I married someone with a good job and we paid of $50k in loans over five years. I know that answer seems kind of smartass, but among my grad school contemporaries it seemed like the only ones who were able to pay off their undergrad debts were the ones with working partners. Sometimes a single stipend just isn't enough. 

 

(But seriously, good advice in other posts.)