This is a companion to our post about applying for student loans. You might want to start there.
So you’ve graduated from college and you’ve got your whole future ahead of you. Also ahead of you is a massive pile of debt. You answered the call of higher education but you had to borrow a bunch of money to do it.
If the concept of a student loan seemed kind of abstract when you were signing the paperwork, picking your courses, or taking advantage of the dining hall’s all-you-can-eat policy, it’s about to feel very real. But there’s no need to panic. If you approach repayment with a plan that fits your budget and needs, you can take on that debt at a pace that makes sense for you.
Of course, it won’t happen overnight, or even over a thousand nights. In all likelihood, this is going to take you a few years. That’s pretty common. If fact, Forbes places the total sum of America’s student loan debt at more than $1.2 trillion so perhaps it helps to know you aren’t alone. We’re all in this together.
As far as paying off your share goes, our advice is to come up with a plan, do your best to stick with it, and if you find that you can’t, take advantage of the flexibility that your specific loan servicer makes available. Here’s how:
Choose a Payment Plan
The very first step is choosing a payment plan that makes sense for you. As you do, bear in mind that you are not only responsible for repaying the principal sum that you’ve borrowed but also any interest that accrues on that amount over the course of your repayment. The rate of interest will depend on the type of loan or loans you’ve taken out. How large this sum is will depend both on how large the principal amount is and how long you take to repay it.
In order to choose a payment plan upon graduation or completion of your studies, contact your loan servicer and find out what your options are. The U.S. Department of Education’s Federal Student Aid Office advises you to visit My Federal Student Aid to find out who your loan servicer is. This, the Office points out, relates only to Federal loans and therefore provides no information regarding private loans. You’ll need to contact your private loan servicer directly to initiate repayment of a private loan.
You can also find out which repayment plans your loan is eligible for and what your monthly payment is likely to be by using the Office’s Repayment Estimator.
The Office of Federal Student Aid identifies eight popular loan repayment options:
- Standard Repayment Plan: All borrowers are eligible for this fixed payment plan on direct subsidized and unsubsidized loans, Federal Stafford Loans, PLUS Loans, and all Consolidation Loans (Direct or FFEL).
- Graduated Repayment Plan: All borrowers are eligible for this graduating payment rate, usually increasing every two years, on direct subsidized and unsubsidized loans, Federal Stafford Loans, PLUS Loans, and all Consolidation Loans (Direct or FFEL).
- Extended Repayment Plan: Direct Loan and FFEL borrowers with more than $30,000 are eligible for either fixed or graduated payments on direct subsidized and unsubsidized loans, Federal Stafford Loans, PLUS Loans, and all Consolidation Loans (Direct or FFEL).
- Revised Pay As You Earn Repayment Plan: Direct Loan borrowers are eligible to pay 10% of monthly discretionary income on direct subsidized and unsubsidized loans, Direct PLUS Loans, and Direct Consolidation Loans. Payments are recalculated annually.
- Pay As You Earn Repayment Plan: New borrowers as of Oct. 1, 2007 and who received a Direct Loan disbursement on or after Oct. 1, 2011 may pay a maximum of 10% of monthly discretionary income on direct subsidized and unsubsidized loans, Direct PLUS Loans, and Direct Consolidation Loans. Payments are recalculated annually.
- Income-Based Repayment Plan: Those with high debt relative to income are eligible for payments of 10 to 15% of monthly discretionary income on direct subsidized and unsubsidized loans, Federal Stafford Loans, PLUS Loans, and all Consolidation Loans (Direct or FFEL, except those made to parents). Payments are recalculated annually.
- Income-Contingent Repayment Plan: Any Direct Loan borrowers are eligible to pay the lesser of 20% of monthly discretionary income or the fixed monthly amount needed to complete payment in 12 years on Direct Subsidized or Unsubsidized loans, Direct PLUS Loans, or Direct Consolidation Loans. Payments are recalculated annually.
- Income-Sensitive Repayment Plan: Payment is derived based on monthly income with intent to complete payment in 15 years on Subsidized and Unsubsidized Federal Stafford Loans, FFEL PLUS Loans, or FFEL Consolidation Loans.
- Perkins Loans: These loans are provided directly by your college and thus are not subject to the same repayment options as Direct or Federal Loans. Contact your school to learn about the Perkins repayment options available to you.
If you have multiple loans of varying type, consolidation is a valuable way to simplify the repayment process while reducing monthly payments and locking in a favorable interest rate on all moneys borrowed. Click here to find out if your loans qualify for consolidation.
For a little more in-depth advice about how to refinance your loan, check out our analysis of 10 Student Loan Refinance Deals You Should Consider.
Make Your Regular Payments
Once you’ve selected your repayment plan, it is critical that you remain on schedule. Your loan servicer will handle all billing. The billing process and cycle is different for every servicer so you’ll have to contact yours with any questions or concerns. Most loan servicers offer an automatic withdrawal option so that you don’t forget to pay your monthly installments on time.
If you are gainfully employed, earning money, and in a position to make this payment, an autopay option is advisable.
If your monthly payment date doesn’t align with your paycheck schedule, many loan servicers will work with you to choose the optimal monthly repayment date. Either way, missing payments will typically result in penalties and, in the long run, a higher total sum of interest. If you miss enough payments, you will be found in default on your loan, a condition which can have a deleterious impact on your credit rating. You don’t want missed student loan payments to threaten future hopes of home ownership or small business loans.
Navigate Financial Hardship
So what to do if you can’t afford to make your monthly payments? Well, first of all, take some comfort in knowing that this is not an altogether uncommon predicament for those just getting out of college. The job market is competitive and your entry level pay may not be enough to allow you to comfortably satisfy your payment plan every month.
Most loan servicers do offer financial hardship forbearance. At any time during the life of your loan, you can reach out and ask for a temporary reprieve from your monthly payments. Sometimes, this will be for a duration selected by your provider. In other cases, you may be able to pick the duration yourself. This can provide much needed relief, especially for those who are in the early stages of their careers and the repayment processes.
Do bear in mind though that this relief comes at a price. In most cases, forbearance for financial hardship will not prevent interest from accruing. This means that every month you decline to pay your loans, the sum of your debt will increase.
There are a few opportunities to either have your college debt canceled or discharged, but these are generally under very specific circumstances. For instance, those who enter certain professions like teaching or public service may be eligible for some form of loan forgiveness.
Those who become disabled may be eligible to have their loans discharged.
Those who attended a college which closed under specific circumstances, particularly loss of accreditation or charges of fraud, could also qualify under some conditions to have their loans discharged.
To see if you qualify under these or other special circumstances, check here.
Pay Your Loan Off Early
Though your repayment plan is usually based on a monthly installments, anything you can do to pay more on a monthly basis, or to pay down portions of your loan in lump sums, could save you a significant amount of money in the long run. If you find yourself in that fortunate position, particularly as you become more secure in your career and finances, come up with a plan for whittling down your principal amount before the life of your repayment plan is through. The more you pay ahead of schedule, the lesser the sum of interest you will ultimately pay.
Got more questions? We’ve got answers! Check here for more helpful tips on stuff that every student should know.