Student Loans: Your 5-Step Plan to Pay Them Off

College debt
College debt

Last month, Rohit Chopra, the student loan ombudsman for the Consumer Finance Protection Bureau, told a Consumer Bankers Association conference that educational debt in this country now tops $1 trillion.

That's a problem in and of itself. But perhaps a bigger one -- at least in the eyes of the parents of those debtors -- is that grads aren't well-equipped to manage this debt. In a recent survey from the nonprofit group Young Invincibles, two-thirds of student borrowers misunderstood or were surprised by aspects of their loans or the student-loan process. And -- according to a report from the Federal Reserve Bank of New York -- more than 5 million are currently delinquent.

Fortunately, the economy seems to be turning where recent college grads are concerned. The National Association of Colleges and Employers says that businesses plan to hire 9.5% more college graduates this year than last. That means the class of 2012 just may have the cash to make a dent in those loans. Now all they need is a plan. Here it is, in five steps:

1. Assess the situation. Many people have more than one loan. Start sorting things out by plugging your information into the National Student Loan Data System, suggests Heather Jarvis, a student loan expert. It will spit back the date each of your loans enters repayment and who the servicer is. In general, the servicer -- which may be different than the lender -- will be the company you will work with in repayment. They are, in other words, your contact if you have questions.

Private lenders are not included in this database. Jarvis suggests pulling your credit report (you can access a free copy at to get a comprehensive list of those loans.

2. Update your information. The address and phone number listed on your loan most likely belong to your parents. This is part of flying the coop: Once you have a more permanent address of your own, change that contact information. Swap out your old school email address. And as you go through future life changes, make sure these are kept up to date.

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3. Set a repayment strategy. Federal loans have more flexible repayment terms then private loans. You can choose to pay off your loans in 10 years or 25 years; you can arrange to make lower payments now and higher payments later; or you can tie your payments to your income -- a particularly good option if you don't find a steady job right away. "The main thing to consider is that a lower monthly payment in the short term likely means extending your repayment term overall, which leads to paying more in interest," says Kevin Walker, CEO of SimpleTuition, which runs a student loan calculator at that can help you weigh your options.

4. Make it automatic. Elect to have payments automatically taken out of your bank account each month. You'll never be late and, better still, paying federal loans this way gets you a 0.25% interest rate reduction. Private lenders may give you a similar break.

5. Focus your efforts. You have to make at least minimum payments across the board, but if you have extra cash, you should also have a plan for where to put it. In general, you want to direct any extra payments toward the loans with the highest interest rates. But there's a catch, says Jarvis: "Although some people will have private loans that are at lower interest rates than federal currently, many have variable interest rates that are quite likely to rise over time." The lower your balance is when that rate jumps, the better.

-- With Arielle O'Shea