Graduating from college is an exciting time. You've finally made it through those four (or maybe five...or six...) years of college and you're ready to get your degree and head out into the world. But wait, you've got loans.
For most people, student loans won't go into any repayment actions until six months after graduation, otherwise known as the "grace period" (or ignorant bliss). So for six months, you may forget about the thousands of dollars that you borrowed for those exciting college years.
The important thing however, is to plan for your student loans, and your student loan repayment options, before the end of that six months sneaks up on you.
Student Loans 101: Understanding Your Student Loan Repayment Options
Typically, students are put on a 10-year student loan repayment plan after they graduate. However, you may be able to request an extended payment plan that could extend to up to 25 years. You can also ask for an extended grace period before your loans go into repayment.
One of the most helpful student loan repayment options is an income-based option. Many student loans will allow you to choose this option, if you qualify. An income-based repayment option takes your current income and usually your living expenses, into consideration when calculating your monthly payment amount.
There are usually four different income-based repayment options:
Pay As You Earn (PAYE)
This payment plan requires that your planned monthly payments must be smaller than your standard payments in order to qualify for the Pay As You Earn plan. This means that the adjusted payment amount that is based off of your income cannot be more than what the standard monthly payment amount would have been.
Payments are then calculated at 10 percent of your discretionary income (the money you have left after paying for things like rent and groceries).
The PAYE plan offers student loan forgiveness after 20 years of repayment.
Revised Pay As You Earn (REPAYE)
The Revised Pay As You Earn plan is the newest option for income-driven repayment plans.
Monthly payments are capped at 10 percent of your discretionary income, but there’s no cap on monthly payments, which means you can participate in REPAYE even if your monthly payments are higher than they would be on a Standard 10-year plan.
The REPAYE plan offers student loan forgiveness after 20-25 years.
REPAYE also includes an interest subsidy that can really help a borrower with monthly payments that don’t cover interest charges. This means that 100% of your unpaid interest each month is paid for on subsidized loans and 50% of unpaid interest is subsidized for unsubsidized student loans.
Income-Based Contingent Plans (ICR)
The Income-Contingent Repayment plan is interesting because your income isn’t actually a requirement for eligibility.
An Income-Based Contingent Plan is a good option for you if you've applied for other income-based options, but were denied.
Monthly payments are calculated at 20% of your discretionary income, which could be lower than the Standard Repayment Plan you may have.
Income-Based Contingent Repayment plans also offer student loan forgiveness after 25 years.
For people who took loans out on or after July 1st, 2014, a general Income-Based Repayment Plan caps your payments at 10% of your discretionary income. You will also receive forgiveness after 20 years of repayment.
If you took a loan out before July 1, 2014, your payments are limited to 15% of you discretionary income. You can qualify for student loan forgiveness after 25 years of repayment.
You have to make sure that the repayment plan from your borrower actually allows you to enroll in a plan that offers income-based repayment, and that you qualify for it.
Student Loan Consolidation
Another option for dealing with student loans is to consolidate them, which means to combine any loans you may have from different borrowers (or federal versus private loans), into one loan.
The benefit of doing this means you have a single payment each month, and it could make it easier to stay on top of how much you owe.
Consolidating your loans can extend your repayment period for up to 30 years. You will also only have one interest rate. Benefits to consolidating your loans vary based on what company you consolidate with, as they will all have different terms and repayment options.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) program is a federal program that may forgive your loans if you have been working for a qualified employer for 10 years.
Qualified employers can be government organizations, tax-exempt non-profit organizations, and other nonprofits. AmeriCorps and Peace Corps workers are also eligible.
To qualify, you normally need to work an average of 30 hours a week with the qualifying organization, and your loans have to be through a qualifying provider.
This repayment option requires you to be part of a regular repayment plan for 10 years, but after that 10 years, the rest of your student loans are eligible for forgiveness if all qualifications are met.
By understanding the loan repayment options you have available, you can make educated choices about how to manage your finances after you graduate.