When federal student loan payments come back in October, it could devastate household finances, especially for people already struggling to make credit card payments.
According to a June blog post from the Consumer Financial Protection Bureau, 1 in 5 student loan borrowers have risk factors that indicate they may struggle to make their student loan payments upon reopening.
The impact will be less significant during the first 12-month student loan origination period, which runs from October 1 to September 30, 2024. You won’t default on your student loans during this period and your credit score won’t plummet due to missed payments. However, interest continues to accrue, making managing the growing debt even more difficult. Use the next 12 months to make consistent payments. You’ll save more money over time and pay off your debt faster.
Here are some strategies to consider when getting started.
1. Review your budget
An updated budget will give you clarity on how much money you have available to pay off your debts. Check your debit and credit card statements to see if there are any opportunities to save money or find cheaper alternatives.
“Start by writing down how you spend your money,” says Kristen Holt, CEO of GreenPass, a nonprofit credit counseling agency.
Prioritize necessities like rent, utilities and transportation, she says. And if possible, try to build an emergency fund of at least $500 to prevent further debt.
“Anything is better than nothing,” Holt says. “If you put $10 of your paycheck into a savings account, it will take longer, but it’s still better than zero.”
Next, decide whether to focus on student loans or credit card debt. Continue to make all your payments, but put more money into high-interest debt to make more progress. Credit cards typically have higher interest rates unless new terms apply through a contract or promotional offer.
2. Seek lower credit card interest rates
If your credit score is 690 or higher, you can qualify for a lower interest rate offer.a balance transfer credit cardFor example, you can move your debt from another account to your card to get a lower interest rate. The ideal balance transfer card is reasonably priced with no annual fee, 0% initial interest rate, and less than 3% balance transfer fee. If that fee is lower than your current expected interest payments, you can use the money saved to pay off your student loans.
If you have balances on multiple credit cards, consider a personal loan that consolidates your debt into one low-interest fixed payment.
If circumstances beyond your control, such as an emergency or layoff, are impacting your ability to keep up with payments, ask your credit card issuer if they have a hardship plan. Depending on the issuer’s terms, interest may be temporarily reduced and fees waived for a specified period of time.
3. Consider repayment plans that match your income
With an income-based repayment plan, your monthly federal student loan payments are based on your income and family size. Debts are also forgiven after 20 or 25 years of payments. the current, Four repayment plans depending on income Consider based on your objectives and loan type.
When it comes to student loans, it’s best to either pay them off right away to save on interest, or pay as little as possible to take advantage of available forgiveness plans, says Renee Arwood, certified financial counselor and student loan coach. says Mr. .
“It’s a case-by-case basis depending on the amount of student loan debt, personal goals, and income level,” Arwood says.
If you’re already on an income-driven repayment plan, Arwood suggests comparing your options in case another repayment plan is better suited to your goals. For example, those with undergraduate loans can switch to the new His SAVE plan as their repayments will be halved starting in July 2024 and the remaining debt may be forgiven sooner if the principal balance is lower. Might consider that.
4. Participate in credit counseling if necessary
When there is no prospect of progress in debt repayment, nonprofit credit counseling agency It might be helpful. A credit counselor will review your financial situation, develop a budget, and determine your eligibility for a debt management plan. This option consolidates your credit card balances into one payment for a fee and pays you at a lower interest rate. If your credit counselor is also a certified student loan specialist, they can help you narrow down your ideal student loan repayment plan.
“We’re going to look at the person’s overall situation,” Holt said. “We do a soft pull of their credit report, but it doesn’t affect their credit score at all. But we know the full picture.”
5. Stop using credit cards
Once you’ve lowered your cost of debt, avoid adding new purchases on your credit card. Temporarily switching to debit cards or cash can help you stay on track with your financial goals.
Since your credit card has a balance and is being paid, it won’t be closed by your issuer for lack of activity. Once you’ve paid off your balance, keep your card open and make small recurring purchases.
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This column was provided to The Associated Press by the personal finance website NerdWallet. Melissa Lambarena is a writer for her NerdWallet. Her email: mlambarena@nerdwallet.com. Twitter: @lissalambarena.
Related Links:
NerdWallet: What is a balance transfer? Should I do it? https://bit.ly/nerdwallet-what-is-a-balance-transfer
Federal Student Aid: Income-Based Repayment Plans https://studentaid.gov/manage-loans/repayment/plans/income-driven
Consumer Financial Protection Bureau: What is credit counseling?
