You’ve graduated, hopefully landed a job in your chosen field, and things are off to a great start. Then you get a statement for your student loans and a notice that your first payment is coming due. When you get this first bill - even if it seems like you can't afford it - there’s no reason to panic.
Instead, I'll show you how to understand your first student loan bill and set yourself up for making regular, on-time payments.
Your First Student Loan Bill
Your first student loan bill will probably come through regular mail (unless you were diligent and setup eStatements with your lender). The return address and the company issuing the bill is your student loan servicer. While you have a Federal student loan, the government doesn’t manage your student loans. Instead, loan servicers handle student loan management. There are a number of servicers the the Department of Education contracts with. Depending on the number of student loans you have, there may be several servicers involved.
Your student loan bill will be in the form of a statement. If you are close to your six month grace period after graduating, it should also be a notice of payment due. Either way, go to the loan servicer’s website and set up your online account. The loan servicer’s website will allow you to make payments online. Once your account is set up and your checking account linked, you can pay your first bill online rather than mailing a check. If there are several days until your bill is due, you can still pay through the servicer’s website. Keep track of any payment confirmations.
Your loan statement or bill will also have the total loan balance, interest rate, and amount to pay each month. The payment will go toward interest first, and then principal. In the next section, we’ll dive into how interest is calculated and what exactly your payment covers.
Understanding Student Loan Payments
Every month, you’ll need to make a payment to each of your student loans. The amount will depend on your loan balance and accrued interest. Interest is the smaller amount of a payment while principal is the larger amount (usually). As the principal is paid down, your interest will decrease.
The interest rate on your loan was set when you borrowed it. Check out this guide on the best student loan rates.
To see how interest is calculated, we can use the undergraduate direct loan with a 5.05% interest rate. If you have a loan balance of $30,000, annual interest will be $30,000 x 0.0505 = $1,515. Take the annual interest amount and divide it by 12 to get the monthly interest. In this case, it will be $1,515/12 = $126.25. If your monthly payment is $300, $125.25 of that amount goes to interest while $173.75 goes to principal. After this payment, the loan balance will decrease by $173.75. As well, your monthly interest will drop by a small amount.
Student loan servicers provide an amortization schedule for each loan. This schedule shows student loan payments across a number of years. This may be 10 years to 25 years depending on your repayment plan. The schedule shows how each payment affects your loan balance. You can see the principal drop with each loan payment. You’ll also see how more of your payment goes to the principal with each successive payment.
Understanding your student loan amortization schedule and using it to your advantage can reap big savings.
Planning Your Loan Payments
Once your online account is set up, setting your loan payments to auto-pay will prevent incurring late fees from missed payments, assuming you always have enough money in your checking account to cover the payment. Additionally, most Federal loans take off 0.25% interest for auto-pay.
On top of auto-pay, there is more you can do to save money on interest. Rather than making the minimum loan payment, simply pay more. This will require some planning on your part. By planning, we mean budgeting. Yes - the dreaded “B” word. However, once you understand and see how a budget helps you to use money more efficiently and help you to meet your goals, you’ll come to like budgets. They are one of the most powerful financial tools available.
Here are some of my favorite tips for paying off your student loans on a budget.
You may not be able to pay more than the minimum on your loans at first. That’s ok. As your career gets underway, there will come a point that your finances should begin to stabilize. Once you feel you have things under control, take a look at your loan amortization schedule. Then log into your loan servicer’s website. They should have a calculator that allows you to see how additional payments affect your loan. If you want to pay your loan off in 3/4 the time (i.e., 7.5 years instead of 10), you’ll know exactly how much additional money to apply to each payment. You’ll save on interest by paying more, shrink your loan faster and be able to regularly measure progress toward your payoff goal.
What If You Can't Afford Your Student Loan Payment?
A bigger problem a lot of borrowers encounter is that they see that first student loan payment, and they can't afford it. What most don't realize, though, is that you automatically default into the Standard 10-Year Repayment Plan. And this plan is the most expensive plan!
If you can't afford that payment, consider applying for an income-driven repayment plan, which will set your monthly payment to a percentage of your income. You can apply for income-driven repayment by calling your lender or applying online at StudentLoans.gov.
The great thing about income-driven repayment plans is that they are also secret student loan forgiveness plans. Any remaining balance on your loan after the repayment period is forgiven, which can be a huge relief for borrowers.
Final Thoughts
When you get your first student loan bill, it can be a bit scary. But if you don't take action and setup a repayment plan you can afford, the long term consequences will be much scarier. So, take action, don't defer your loans if you don't have to, and start making payments that you can afford.
