It’s finally March and you’re nearing the end of the school year; congratulations, you’ve almost made it! However, for many graduates, and for those of us planning ahead, there is a looming question to answer: how do I pay off my student loan? So, here is some advice on how to best navigate this question.
Make Timely Payments
Whether you’ve borrowed money from the government or a bank, the most important thing to remember is to make your payments on time each month. This will protect your credit rating. The good news is that government loans typically come with a 6-month grace period where you aren’t charged upon completion of school, so you have some time to get established and working. Banks typically provide a one-year grace period during which time you are only required to make interest-only payments.
What does that mean?
It means that for the first year that you are out of school, you don’t have to pay down the principal amount you borrowed, only the interest of that loan.
Everything you borrow (including loans, credit cards, lines of credit) comes with a rate of interest. You are charged interest monthly on any money that you owe the lender of that loan. Watch the following video for more information:
Should I pay it off faster?
That is entirely up to you, but the longer you take the pay the student loan, the more interest you pay on it.
Here’s an example: If you have a $25,000 government student loan, with a 5.5 percent interest rate, you will end up paying an extra $7,555.88 in interest over the life of your loan (total repayment period of 9.5 years).
While in school, we encourage students to make a budget each year and review it periodically to help ensure their funds last throughout the year. Once school is done, establishing a budget is still key to managing your finances. A budget will enable you to allocate funds to make your loan payments. Depending on your income and personal situation, you may have the option to pay more than the minimum amount. Any additional money you can allocate toward your loan payments will help you pay the loan off sooner.
Luckily, banks have free online tools that will help you stay on track, like the RBC Student Budget Calculator. Alternatively, there are other non-bank options as well. As always, we suggest making an appointment with your financial advisor. A financial advisor will help you put your plan into action and provide you with advice tailored to you.