Federal student loan interest resumed on September 1, 2023, and payments restarted in October 2023. If you have been avoiding your student loans, you can no longer hide. Here are five key steps you can take to prepare for upcoming payments and get your finances in order.
Review Your Budget Now
The most important step you can take is to adjust your budget to prepare for your monthly student loan payment(s). It has been over three years since you have had to make those payments, so now is the time to reassess. Consider using a budgeting app, where you can link your accounts to make the process quicker and easier. This will make the transition back into paying your student loans a seamless one.
Build Your Emergency Fund
If you do not have at least 3-6 months of living expenses in a high-yield savings account, this is your next step. Having an adequate emergency fund prevents you from going into debt or further debt when an emergency arises. If saving 3-6 months is overwhelming, work to save up one month of expenses at a time. You can also establish another savings account for other financial goals you may have, such as a down payment on a house, wedding, or vacation.
Pay Off High-Interest Debt
Once your savings are in place, use the extra funds to pay down debt that has a higher interest rate than your student loans, most likely credit card debt. This will not only reduce your overall debt but also improve your credit score. Credit cards with no annual fees should typically be left open, since length of credit history is a factor in your credit score, as long as you are confident you will not build up a balance again.
Boost Your Retirement Savings
If you have no high-interest debt, first give yourself a pat on the back, and then, increase your retirement contributions, either through your workplace 401(k), IRA, or Roth IRA. You could also consider opening a brokerage account to invest additional long-term funds that are not necessarily for retirement, but make sure you understand the tax implications for this specific type of account first.
Understand Your Repayment Plan Options
Before you start paying back your loans, review your current repayment plan and determine if it is still the right fit for you. If you are on the standard repayment plan, you may consider switching to an income-driven repayment plan if you’ve experienced a loss of income to lower your monthly payment or exploring the Public Service Loan Forgiveness program if you are employed by a government or not-for-profit organization. There also is a new income-driven repayment (IDR) plan called SAVE, which has several unique benefits that may lower your monthly payment.
Every option has its benefits and drawbacks, so be sure to do your research before coming to a decision. Reach out to a financial planner if you need assistance selecting the right plan for you.
There is no better time than the present, so review your finances and prepare now!