According to the latest estimates, 70% of the class of 2016 will graduate with student loan debt, and the average 2016 college graduate with loans will owe $37,172. While this may seem like a lot of money (and it is), the good news is that student loan debt is more flexible than most other forms. You can temporarily suspend payments rather easily, choose between several repayment plans, and even have some of your loan balance forgiven eventually. With that in mind, here's what you need to know about your student loan debt after you graduate.
Note: The information in this article applies to federal student loans. If you have loans from a private lender, like a bank, much of this does not apply. Consult your lender for information on repaying your private student loans.
When do you have to start paying back your loans, and who do you need to pay?
The short answer to "when do you have to start paying back?" is six months after you graduate or otherwise drop below half-time enrollment. This is the grace period on most federal student loans.
There are a few things to keep in mind. First of all, PLUS loans don't have a grace period and enter repayment as soon as they're fully disbursed. And the grace period for a Federal Perkins Loan depends on the school from which you received it.
It's also important to remember that for most loans, interest will accrue during the grace period, but you aren't required to wait six months to start paying your loans back. There is no penalty for early repayment, so if you want to keep your interest expense as low as possible, you can start paying your loans back as soon as you're ready.
If you don't know who your loan servicer is, you can find this and other information about your loans in the National Student Loan Data System.
You'll be able to choose from several types of repayment plans; the best one for you depends on your personal situation and expected income throughout your career. Here's a rundown of the different options:
- Standard repayment: This is the "default" repayment plan, and amortizes your loan's balance over a 10-year period. Generally, this results in the highest payment, but you'll pay less interest over the life of your loans.
- Graduated repayment plan: Just like the standard plan, this is a 10-year repayment plan, but your payments will start out lower and increase over time, usually every two years. (Note: for consolidation loans, terms for the standard and graduated plans can be up to 30 years.)
- Extended repayment plan: Borrowers with more than $30,000 in outstanding Direct Loans or FFEL loans are eligible to stretch their loan amortization as long as 25 years. This will result in a lower payment, but you'll pay more interest. Payments can be the same over the loan's term, or graduated.
- Revised Pay as You Earn (REPAYE): The newest repayment option, this limits your payments to no more than 10% of your discretionary income. Under this and all other income-driven repayment options, your payment is recalculated each year based on your income and family size. After 20 or 25 years (depending on whether or not you have loans for graduate study), any remaining loan balance will be forgiven.
- Pay as You Earn (PAYE): Only available to new borrowers on or after October 1, 2007, this plan also limits your monthly payments to 10% of discretionary income. Unlike the REPAYE plan, your monthly payment will never be more than your standard plan's repayment amount, and any outstanding balance will be forgiven after 20 years, regardless of the level of study the loans were for.
- Income-Based Repayment (IBR): Depending on when you took out your first loan, the IBR plan limits your payment to 10% or 15% of your discretionary income. Your payment is capped at the standard plan's payment, and any outstanding balance will be forgiven after 20 or 25 years.
- Income-Contingent Repayment (ICR): This limits your monthly payment to the lesser of 20% of your discretionary income or the amount you would pay on a 12-year fixed repayment plan. Outstanding balances are forgiven after 25 years.
Of course, there is much more to these repayment options than I've mentioned here, and if you want the full details, you can check them out here. And the U.S. Department of Education provides this calculator to help determine what your payments might be under each plan.
It's also important to mention that these options apply to Direct Loans, and some apply to PLUS Loans. Perkins Loans have different repayment options, and if you have one you should check with your school for details.
Are you going to teach or work in public service?
If you fit into either of these categories, there are two loan forgiveness programs that could help you eliminate some or all of your student debt.
For teachers, the Teacher Loan Forgiveness Program can allow eligible teachers who serve in certain low-income schools to have up to $17,500 of their student loans forgiven after five complete and consecutive years of service. The full amount is given to highly qualified math, science, or special education teachers, while all qualifying teachers can receive $5,000 in forgiveness.
The Public Service Loan Forgiveness program is the big one. It allows any remaining balance to be forgiven after 10 years working full time for a qualifying public service employer while making monthly payments under certain repayment plans (the standard and income-driven plans qualify).
For more information about both of these forgiveness plans, check out this other article.
What if you can't make your payments?
If you can't afford your student loan payments, even with the most favorable repayment plan, it's not necessarily a reason to panic. You may be eligible for a deferment or forbearance through your loan servicer.
A deferment is a period of postponement of your loan payments. During a deferment, you won't need to make your loan payments, and the federal government will continue to pay the interest on any subsidized loans you may have. However, interest will continue to accumulate on your unsubsidized loans. For most federal loans, you may apply for deferment if any of the following situations apply:
- You're enrolled at least half-time in school, or you're in an approved graduate fellowship program
- You're unemployed or unable to find full-time employment
- You're experiencing a period of economic hardship
- You're on active duty service in the military, or your active duty service ended less than 13 months ago
If you don't qualify for a deferment, a forbearance is another option. A forbearance allows you to stop or reduce your loan payments for up to 12 months, but interest will accrue -- even on subsidized loans.
In the event of a financial hardship or illness, your lender decides whether to give you a forbearance or not. On the other hand, there are some situations where your lender is required to grant your forbearance. Just to name a few of them, you're qualified for a mandatory forbearance if any of these situations apply:
- Serving in a medical or dental internship or residency program
- Your student loan payments add up to 20% or more of your monthly gross income
- You anticipate qualifying for teacher loan forgiveness
The bottom line on your student loan debt
Your student loans may be intimidating -- especially now that you'll actually have to start paying them back. However, they don't need to be. As long as you know how the system works, you can make the best decisions for your loans, and you'll know what to do if you run into trouble.