After your post-graduation elation wears off, reality begins to set in. It’s time to get a job, pay for your own phone and car insurance, sign up for your own healthcare plan, and to start paying those student loans back. While you can certainly request and take advantage of a deferment period, the time allowed varies, and the interest continues to accrue. However, deferments are not the only option for payment relief. You may be able to refinance loans into smaller, more manageable payments. This is an option that is typically lost on younger grads, as they have little to no experience with loans options and repayment. Students can make some costly mistakes as they transition from college to the workforce, particularly when trying to pay back a student loan. As you plan for your success, here are some options for managing your debt and avoiding disaster after graduation.
Avoid Additional Interest During Grace Period
If you have a subsidized federal loan, then you will not have to pay interest during your grace period. However, that is not the case for all federal loans. Interest accrues on a daily basis, and if you don’t start paying on a subsidized loan, then it becomes “capitalized.” This means that interest is added to the principal balance of the loan. Basically, you will end up paying more than the original loan you borrowed. It’s important to start paying back your loans before they become a detriment to your finances.
Deferment After Graduation
Federal student loans allow students a grace period of six months after graduation before repayment begins. This time allows you to get a job and get your finances in check so you can start repayment. However, unsubsidized loans do not have a grace period on interest. You will still accrue interest during this time. In addition, you can extend your grace period, but your loans will start to accrue interest during these deferments since they are not part of the six-month period. These deferments typically are granted based on unemployment and other hardships.
Not Looking into Consolidation
If you have multiple student loans weighing on you, consider consolidating your payments. This method lowers your overall payment amount each month. However, you should keep in mind that you will still have to pay interest. In addition, consolidating federal loans into one payment is a free service. Despite the multitude of services offering to help you with this transition, they are certainly not necessary.
Choosing the Right Repayment Options
There is a standard repayment plan provided to all borrowers. The “Pay as You Earn” (PAYE) program caps your payments to 10% of your discretionary income. The amount you owe is independent of this calculation and not taken into account for your monthly payment amount. You may also opt for “Revised Pay as You Earn” (REPAYE), which is like PAYE but there is no limit to how high payments might increase as you earn more money. They also come with the added benefit of potential loan forgiveness after 20 qualified years.
There are also income-based, income-contingent, graduated, and extended repayment plans. A popular option for those in their early earning years is the graduated repayment plan. This will start off with a lower payment amount that increases over time. Most balances are forgiven after 20 or 25 years.