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6 things student loan borrowers need to consider now before loan payments are due in October

The end of the payment pause will pose problems for millions of borrowers.

We asked experts: What should borrowers be doing now to afford those payments starting next month?

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Millions of borrowers have no doubt enjoyed the three-and-a-half-year student loan payment pause, but those payments will resume in October — and that’s going to be a problem for many. According to July research from financial services company Empower, plenty of Americans anticipate having to cut back on discretionary spending, take on credit card debt, dine out less and or even consider trading in their car, living with roommates or forgoing travel — all to afford those payments.

So we asked experts: What should you be doing now to afford your student loan payments come October?  Here are some pro tips.

Free up money to make payments

The first thing to do is get a handle on your spending. Look back at your spending and bank statements from the last 3-to-6 months, advises Casey D. Craig, founding partner at Highlander Financial Group, which is affiliated with wealth management firm LPL Financial. And starting now, Mark Kantrowitz, student loan expert and author of How to Appeal for More College Financial Aid, says borrowers should track their spending for a month.

“Record every expense in a spreadsheet or in Quicken or Tag each expense as mandatory or discretionary and categorize it into broad categories like food, transportation, housing, medical care, insurance and taxes. At the end of the month, total up each tag and category to help you identify whether you need to cut spending and how much to cut to make room for the student loan payments,” says Kantrowitz. Adds Craig: “Also look ahead to any payments or things you have on the calendar like trips or vacations and try to construct what those future expenses might look like.”

Consider ways to make the payments more bearable

Should you discover that cutting discretionary spending isn’t enough, Kantrowitz recommends seeing if there is any “mandatory” spending that actually could be cut, as well as asking for a raise, working an additional part-time job or switching to a repayment plan with a lower monthly payment, such as extended repayment or income-driven repayment. With an extended repayment plan, the loan balance is lengthened to 25 years, while income-driven repayment plans alter monthly payments to reflect the borrower’s income and family size.

If you cannot find room in your budget or would be forced to cut fully essential expenses, Brian Walsh, certified financial planner at SoFi, says, “Your focus may be on minimizing monthly payments. If there is room or you would need to cut discretionary expenses, then your focus may be minimizing the amount you pay back over the life of the loan. Review the repayment options that align with either minimizing monthly payments or total amount paid back,” says Walsh.

But more than prioritizing debt and loan payments, Craig says, “Once you understand how much your student loan payment will impact your current budget, you should consider how you can perhaps reprioritize your other savings goals, or at least some of them, to meet your loan obligations, says Craig. At the same time, look at your recreational obligations, like whether or not you have any trips booked or vacations planned and acknowledge that you may have to cut back a bit on these or other spending activities in the meantime. “You could then also consider whether your other existing loans could possibly be restructured, combined or refinanced,” says Craig. See some of the best student loan refi rates you may get now here.

Build an emergency fund if you can

“Emergency savings are a critical component of financial wellness and with student loan payments back in the picture, many people will have less discretionary income to use if something goes wrong. You don’t want to slip into debt if that happens so consider building a cash reserve now,” says Vance Rusley, financial professional at Empower. Exactly how much you should have saved for a rainy day depends on many factors, but most experts advise having at least 3 months’ worth of expenses in an easily accessible account. See some of the best savings account rates you may get now here.

Get clear on your loan details

Make sure that your loan servicer hasn’t changed as some servicers have recently been replaced by others. Then, contact your loan servicer to ensure you’re clear on things like your loan interest rate, amount due, monthly payment dates, length of repayment and other important terms related to your loan. 

“There’s no reason to derail your long-term financial goals by being unaware of how the end of the payment moratorium will impact your monthly expenses. Remember that interest hasn’t accrued on loans during the moratorium, but they’ll begin accruing again in September and should be taken into account before payments resume in October,” says Carlos Rodriguez, director of financial planning at Edelman Financial Engines.

Look at which debts to pay off quickest

Though it may seem implausible, Rodriguez recommends making student loan payments in full each month. “However, like all important financial decisions, student loan debt should be incorporated as part of your holistic, long-term plan. There are trade-offs and opportunity costs that must be considered if you’re balancing student loans with other types of debt. Credit card debt is often our most expensive debt and I recommend paying it off ASAP, especially before you look to pay off student loan debt,” says Rodriguez, who adds that you should pay the minimums on all debt.

Indeed, not all debt is created equal and typically student loan debt is considered good debt since it has lower interest rates and is taken out to enhance your earning power. “Debt such as credit cards, personal loans or some car loans would be considered bad debt since they have higher interest rates and tend to accelerate consumption. You should prioritize aggressively paying off bad debt before good debt because it’s more costly,” says Walsh.

In short: While of course it’s important to pay the minimums on all debt, but if you’re able to put additional funds towards paying off more than the minimum, applying it to the most expensive debt like credit cards, can save you money in the long run.

Make a plan to pay off debts

Experts say that while paying off debt often feels overwhelming, it doesn’t have to be complicated. “Once you see all of your debts in one place, decide on your payoff method. Many people choose the snowball method where you tackle debt with the smallest balance first and continue to make minimum payments on all debts. Other people choose the avalanche method where you list your debts by interest rate and tackle the debt with the highest interest rate first. Whichever approach you take, make sure you’re making the minimum payments on all of your debts so your accounts don’t become delinquent,” says Rusley.

Adds Michael Kitchen, LendingTree’s student loan repayment expert: “Some people prefer to focus on the loans with the smallest balances since they find a lot of motivation from seeing those smaller loans drop off their debt lists,” says Kitchen.

Because many borrowers are not students themselves, but their parents, relief strategies change. “If you’re close to retirement or in retirement, your ability to create income to pay off debt is more challenging. In this case, trading student debt for more optimal debt is the best path forward and asset-backed loans can be a great tool. If the asset is real estate, you can refinance your mortgage or set up a home equity line of credit (HELOC) and even with today’s high interest rates, you still may be able to reduce your monthly costs by hundreds of dollars,” says Michael Gennawey, LPL-affiliated financial adviser and program manager at SoCal Wealth Management.