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Graduating with Less Debt

College Planning Credit.com

It’s easy to ignore your student loans while you’re in school — if no bills are due, why would loan payments be on your mind? It’s a practical strategy to wait till you’ve graduated to start repaying your debt, but you can make your loans more affordable if you start chipping away at it early.

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There are plenty of reasons to save or earn a little extra money while you’re a student: build an emergency fund, set aside money to buy a home or car, save for retirement or allow yourself the occasional treat. At the same time, if you’re able, starting to work on repaying education debt will allow you more financial flexibility in the future. If you’re one of the millions of students financing your education this year, here are some ways to reduce your debt while you’re still in school.

1. Pay the Interest

Most loans accrue interest while you’re in school. Federal direct subsidized Stafford loans are an exception, because these loans are awarded to undergraduates with financial need, and the Department of Education pays interest on these loans while the student is enrolled at least half-time in school, in the grace period before repayment and during any period of deferment.

Other loans will accrue interest from the day they’re disbursed, and that can add up to a considerable amount of money, depending on the size of the loan, the interest rate and the amount of time between disbursement and repayment.

“If possible, pay the interest on the loan while still in school,” said Megan McClean, managing director and federal relations for the National Association of Student Financial Aid Administrators (NASFAA).

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To make payments on your student loan interest, you’ll need to go through your loan servicer. You should be contacted by your loan servicer when your loan is disbursed, but in case you’re not sure how to access your loan information, you can reach out to your school’s financial aid department and ask an adviser to work with you.

2. Return Your Refund

Once your loan has been disbursed to your school and your tuition and fees have been covered, you may receive a refund check for the remaining loan balance. Sometimes, that causes students to realize they’ve borrowed more than they need, or they don’t know what to do with the money and spend it unwisely.

“A lot of parents and students don’t know this: The amount you are awarded on your financial aid award letter, you don’t have to take it all,” McClean said. Ideally, you only accept the amount you need, but if you’re past that point, the loan has been disbursed and you receive a refund, you can give that money back to your loan servicer.

If it’s an unsubsidized loan, it will have started to accrue interest. Your options for returning part of the loan vary based on several factors, and you’ll want to consult your loan servicer and financial aid department to make sure you proceed properly.

“If any student is getting a refund check and realizes, ‘Whoa I don’t need all this money,'” said Karen McCarthy, senior policy analyst for NASFAA. “They should consult with the aid office to make sure they really don’t need that money. … You don’t you want to send money back and realize you can’t pay your rent next month because you were supposed to use loan money for that.”

If you’ve been issued a refund check already, it’s a little more complicated to return the money, rather than having the school return it for you, McCarthy said, so it’s best to pay attention early on so you don’t borrow more than you need.

3. Cancel Your Loans

Another option for reducing debt: Cancel it. Use student loans only for what you need. Perhaps when you accepted your financial aid award, you thought you’d need more than you did, but now that school has started, you realize you could have taken out a smaller amount of loans. Even shaving $500 off your loan balance will translate to significant savings, McCarthy said.

“Whenever a school disburses a loan to a student’s account, they’re required to send a right to cancel notice,” McCarthy said. The letter will explain the timeframe within which the student can cancel or reduce the loan amount and have the school send back the money on the student’s behalf.

No matter your repayment strategy, make sure you’re staying on top of your loan payments. Falling behind can seriously damage your credit and increase the cost of education loans, and that will have a negative impact on other aspects of your finances. Student loans generally must be repaid, and they can help your credit if you handle them responsibly. To see how student loans affect your credit, you can check two of your credit scores for free on Credit.com.

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