College Graduates

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A whopping 68% of today's college graduates have student loan debt when they finish their degrees. If you're one of the many soon-to-be graduates who borrowed money for school, then there are a few things you need to know about your student loans -- some of which could save you thousands of dollars.

When do you need to start paying back your student loans?

The short answer is that you'll probably need to start repaying your federal student loans six months after you stop attending school on at least a half-time basis. This grace period is intended to give you enough time to find a job and start generating income before you have to worry about yet another monthly bill. So, if you graduate in May, plan to make your first student loan payment in November.

The six-month grace period applies to direct subsidized and unsubsidized federal loans, federal Stafford Loans, and even some private student loans. However, it's important to note that PLUS loans don't have a grace period at all, and the grace period on federal Perkins loans depends on the school that gave you the loan.

If it's been a few months since you've graduated and you haven't heard anything about your loan repayment, then it's still your responsibility to find out when, and to whom, you need to start making payments. Your school's financial aid office should be able to help you determine who your loan servicers are. Otherwise, you can look up this information on the National Student Loan Data System.

Your repayment options -- which is best for you?

Your loan will probably default to the standard repayment plan, which consists of equal payments over a period of 10 years. However, your federal student loans have several other repayment options available, and here's a brief overview of each:

  • Standard: As I mentioned, this repayment plan consists of fixed monthly payments for a 10-year period.
  • Graduated: This is also a 10-year repayment plan, but your payments will start out lower and gradually increase, typically every two years. This can be a good option if you plan to make significantly more money as you get established in your career.
  • Extended: The extended plan can consist of fixed or graduated payments, and the repayment period can be up to 25 years. You'll need more than $30,000 in outstanding loans to qualify, and while your monthly payment will be lower than it would be under the first two plans, you'll pay more interest if you choose a longer repayment period.
  • Income-Driven Repayment: There are several repayment plans based on your income, including the Pay As You Earn (PAYE) plan, the Revised Pay As You Earn (REPAYE) plan, Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Under these plans, your monthly payment will be based on a percentage of your discretionary income (10% to 20%, depending on the plan), and any remaining balance will be forgiven after 20 or 25 years. If you work in a low-paying field relative to the amount of your student debt, or if you expect to take advantage of one of the forgiveness programs I'll discuss in the next section, then one of the income-driven options is probably the best option for you.

Will you qualify for loan forgiveness?

There are a few rare circumstances that can result in your loans being forgiven or discharged. For example, if your school closes or if you become permanently disabled, your loans can be discharged. However, there are two common forgiveness programs that you may be able to qualify for.

Teacher Loan Forgiveness, as the name implies, is available to elementary and secondary school teachers that work in schools serving low-income families. To qualify, you must teach for five consecutive years in a qualifying school. Up to $5,000 in loan forgiveness may be granted for all teachers who qualify, and those who teach secondary math or science, or special education at any level, can qualify for up to $17,500 in forgiveness.

Public Service Loan Forgiveness is available to qualified full-time employees of government organizations and other non-profits. After making 120 qualifying monthly payments on student loans while working for such an employer entitles the borrower to have the rest of their balance forgiven.

What to do if you can't pay

If you're unable to make your student loan payments, don't panic. There are options available that may help you. For starters, consider changing your payment due date to coincide with the day you get paid, or see if another repayment plan might result in a lower monthly payment.

If you can't afford your loan payments, even with the most favorable repayment plan, then you could qualify for a deferment or forbearance through your loan servicer.

A deferment is the more favorable option if you qualify. This is a period during which you postpone your loan payments. During a deferment, interest will continue to accumulate on your unsubsidized loans, but the government will continue to pay the interest on your subsidized loans. For most types of federal student loans, you can apply for a deferment if any of the following apply:

  • You go back to school on at least a half-time basis.
  • You're 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 service ended within the past 13 months.

A forbearance could be another option if you don't qualify for a deferment. Just like a deferment, a forbearance is a period during which you don't have to make loan payments, but with a couple of key differences. First, a forbearance is limited to 12 months. Second, interest will accrue on all your loans during a forbearance -- even on the subsidized ones.

The bottom line is that student loans may seem frightening, especially as you're just finishing school and preparing to look for a job. However, if you understand your loan's grace period, the repayment options available, and what you can do if you're unable to make your payments, your student loans don't need to keep you awake at night.

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