Do you feel like no matter what you do you aren’t making progress with your student loans? This feeling can appear at any time, but it’s especially present when moving from a standard to income-based repayment plan. I know for me, it felt like I would never finish paying my loans. How could I ever get ahead if my payments aren’t even covering the interest that accrues every month?
That is where budgeting and organizing my finances really helped me. In my first year, I was able to put $15K to my debt and I had similar success in my second year. If you are on an income-based repayment plan, use these five steps to make sure you are making the most of your plan.
5 Steps to Making the Most of Your Income-Based Repayment Plan
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1. Submit Your Documentation
I can’t stress this enough: your documentation for your income-based repayment plan is KEY! You must submit your documentation for every year you want to have (or are eligible for) this plan to account for income or family size changes.
Most importantly, you must submit it on time!
If you are late or don’t submit your plan at all, you will get kicked off of IBR and your unpaid interest will capitalize. This could have a huge financial impact since you are now paying interest on your interest.
You should also submit documentation whenever you have a major life change such as loss of your job or changing to a lower income. This can lower your monthly payment.
If you have a pay increase, you can submit documentation when it occurs or you can choose to wait for your annual renewal to avoid an immediate higher payment.
Helpful tip: submitting your annual documentation through your tax return is easier and more helpful then submitting pay stubs. You can link directly to the IRS data retrieval tool when you apply for recertification. Your tax return may also show a lower yearly income because of deductions claimed. With your pay-stub, the lenders will not take deductions into account so you may pay more with that method.
Stop the overwhelm!
Get yourself organized and set a plan of action for your student loans using my FREE printable!
2. Make Your Monthly Payments On-Time
On-time payments are critical to your income-based repayment plan.
While you are on this plan, your interest will continue to accrue even if your monthly payment doesn’t cover it all. If your monthly payment does not cover the interest, make sure to never miss a payment because your interest will capitalize just like if you forgot to submit your annual documentation.
To make it easier, make sure you either 1) sign up for auto-debit which will automatically take out your payment (check out my mistakes to avoid for more information) or 2) add it to your calendar and make sure to schedule out your monthly payment in time.
My private LendKey loan and my Navient federal loan have auto-debit but I manually pay for MyLoanServicing federal loans.
Decide which one method is right for you and create a plan to pay on time each and every month.
Here are my other Do’s and Don’ts while paying your loans.
3. Create and Stick to a Budget
Budgets are not the enemy! I wish I had known that from the start. I only started budgeting two years ago.
It wasn’t until I found YNAB and began budgeting that I actually felt like I was making progress with my debt.
I still have a long way to go, but I would not be this far without a budget.
You can learn how to start a budget in five simple steps here.
What can you cut from your budget? Do you make daily trips to Starbucks? Do you buy too much clothing? Even if you just cut back on those things if you can’t cut them out completely will help.
Give yourself a set amount you can spend in those categories. Once you reach that point, don’t buy any more for the rest of the month! Pace yourself with your budget limit.
You can also try to bring in some extra month through taking online surveys, finding other side hustles, or selling unwanted items. If you made heavy budget cuts, you can either put that money to the “fun money” you cut out, or you can put that extra money right to your debt.
Every little bit helps, but beware that if you cut too much too quickly, you may revert to your old spending habits.
4. Make Your Debt Payoff Plan
Organizing yourself financially is one of the best things you can do to make progress on your debt. You need to understand what debts you have, your monthly payments, etc. You can then make your debt payoff plan. Which debt will you pay off first? Will you use the debt snowball or avalanche method?
(With the snowball method you pay the minimum on all your debts except for the smallest one. Put everything extra to that debt until it is gone. Then you can add that payment onto your next lowest debt. With the avalanche you pay off the highest interest rate debt first while paying the minimum on the rest.)
If you are confused over which method makes the most sense, you can use the free tool that I use called Undebt It. You can plug in all your debts, their minimum payments, and their interest rates. It will give you several repayment options so that you can see how much you would pay in the long run with either of those methods. Plus, it’s FREE! No excuse not to give it a try!
I will add to use your own judgment if there is a scenario that the snowball or avalanche method can’t figure out.
For instance, my car loan was neither my smallest debt nor highest interest debt but I decided to make it my first priority because I knew my income-based repayment was increasing.
I wanted to pay off the car before that happened so I wouldn’t take such a financial hit. If there is something like that for you, then use your best judgment when deciding which debt to attack first.
Understand that your student loans may take a backseat with your debt repayment plan if you have high-interest credit cards or another type of debt that you want to eliminate first. This is OK. Student loans may have more protections (such as forbearance or interest rate deductions) than your other debts.
Pay off the ones that will hurt you the most financially.
Stop the repayment confusion!
Start understanding your student loan repayment options with my FREE PDF guide! It includes information on standard, graduate, extended and income-based repayment plays. It also talks about consolidation, forebearance, and loan forgiveness. Get the PDF that gives you your information all in one place! FOR FREE!
5. Be Prepared For Setbacks
Setbacks and obstacles are a part of life, but if you are prepared then they hopefully won’t be as bad. If you have your budget, make sure you are setting aside some money for rainy-day funds and/or an emergency fund.
If something unexpected happens, like an injury or layoff, then hopefully you will have some sort of financial buffer so that you don’t dig yourself into even more debt.
Ideally, you should have 3-6 months of income saved away, but for those of us with huge amounts of debt, this isn’t feasible.
The recommendation I have seen across the board is a $1,000 emergency fund that would help for small medical, car problems, or other emergencies. Add a little each month towards this or other rainy-day funds (such as car maintenance, home repairs, etc) for some financial peace of mind.
- Submit your annual income-based repayment documentation
- Make your payments on time
- Create a budget
- Create a payoff plan
- Be prepared for setbacks
- YNAB– the budgeting tool I use. Try it free for 34-days!
- Undebt It– FREE debt organizational tool. It will help you figure out the best method for paying down your debt.
- A free student loan organization printable
- This free PDF of student loan repayment options
- My free checklist of the steps I took to pay off massive amounts of debt
Feeling stuck and frustrated by debt?
Use this FREE workseet to make sure you are making progress on your debt pay off plans. Use the steps that I took when I finally started making real progress on my debt!