Starting a business is always a risky endeavor, but it can be especially so if you’re struggling with your personal finances. Student loan debt is an oppressive burden for many college graduates. According to Student Loan Hero, class of 2018 graduates left school with $29,800 in student loans.
While building a successful business can make it easier to handle your student debt later on, it’s important to have a plan to manage it responsibly until you achieve that goal. Here are some tips that can help you get there.
How to Manage Student Debt While Starting a Business
Automate your payments
Starting a new business requires a lot of energy and focus, and it’s easy to get caught up in what you’re doing and forget other priorities. If you miss a loan payment, though, it could negatively impact your credit score, which can hurt your chances of getting a business credit card or small business loan.
By setting up automatic payments, you don’t need to worry about keeping track of when your payments are due or spend the time each month to pay them manually.
What’s more, some student loan servicers may offer a discount on your interest rate if you get on autopay. The discount is usually just 0.25%, so the savings aren’t huge. But anything that helps is a good thing.
Get on an income-driven repayment plan
If you have federal student loans and need some extra cash flow to put toward your new venture, you might consider getting on an income-driven repayment plan.
The U.S. Department of Education offers four such plans, and each reduces your monthly payment to between 10% and 20% of your discretionary income, which is calculated based on your income level and family size.
Depending on your current payment and your household income, doing this could drop your monthly payment by hundreds of dollars.
Keep in mind, though, that some of these plans require that you prove financial need, so you may not necessarily get the one you want. Also, your monthly payment is calculated every year, so as your income grows from the business over time, your payment can increase as well.
If you move forward with one of the plans, your repayment term will be extended from 10 years to up to 25 years, which means you’ll pay more interest over the long run if you don’t pay off your debt early.
Finally, income-driven repayment plans are typically reserved for federal loans. Private lenders, including banks and credit unions, typically don’t offer them.
Consider refinancing your loans
Whether you have federal or private student loans, refinancing them with a private lender could potentially help you lower your monthly payment, interest rate, or both.
Student loan refinancing involves replacing your current student loans with one new one. If your credit history and income are strong enough, you may even be able to qualify for a lower interest rate than what you’re currently paying.
Student loan refinance lenders also typically offer a range of repayment terms. So if your current repayment term is 10 years, you may be able to extend it to 15 years or beyond, which can lower your monthly payment even more — although it’ll also increase how much interest you pay over the life of the loan.
If your credit and income aren’t strong, however, you may have a hard time getting better terms unless you have a co-signer who meets the criteria.
One thing to note is that refinancing student loans is slightly different than consolidating them. Student loan consolidation typically refers to the federal consolidation program. With this program, you can replace all of your federal student loans with one new loan.
While that can simplify your life, the interest rate on the new loan will always be higher than what you were paying before — it’s calculated as the weighted average of all of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent.
So if you’re trying to lower your interest rate or monthly payment, consolidation isn’t the answer.
That said, refinancing federal student loans means you’ll no longer have access to certain benefits, including income-driven repayment plans.
Forget about default
It may be tempting to stop making payments on your student loans altogether, hoping they’ll just go away. But student loan default can only make matters worse.
For one thing, it’s incredibly difficult to get rid of student loans this way. They’re generally not dischargeable in bankruptcy, and if you have federal loans, a government-contracted loan servicer can garnish your wages to get payment.
Also, defaulting on student loans typically means that you owe the full amount immediately. There are ways to rehabilitate them and get back on a regular payment plan, but that process can take months, and it can ruin your credit in the meantime.
The bottom line
Student loan debt is no joke, and it’s important to take it seriously if you’re considering starting a business. While there are ways to lower your monthly payment, it’s important to keep in mind that doing so could increase the total amount you pay on your debt.
If you’re fine with that and prefer to have more cash flow now, things like income-driven repayment plans and refinancing can help you get what you need. Most importantly, though, make it a goal to pay all of your student loan bills on time to avoid potential financial and credit repercussions.
This article was originally written on March 22, 2019 and updated on December 10, 2020.