Learn how to make a loan repayment plan
Many students graduate college with a degree and a stack of student loans. On average, the average borrower has $37693 in student debt. Creating a plan for paying it off is essential–especially since you have, at best, only a six-month grace period after graduation before you have to start paying back those loans.
This grace period is not available to all borrowers. Federal student loans offer a six-month grace period after graduation that allows borrowers to plan their debt repayment budgets. Private student loan lenders might offer a grace period.
Understanding the grace period is helpful so that there are no surprises when it comes time to repay student loans.
Described: Student Loan Grace Periods
Grace periods are a period during which student loans do not have to be paid. The grace period applies to most federal student loans and lasts six months.
- Graduating from college
- Stop going to school
- Half-time enrollment is not possible
This is a six month window. However, Perkins loans may allow you to start repaying student debt in as little as nine months. Federal PLUS sun loan company do not have a grace period. Instead, you can benefit from a six month deferment period if your enrollment drops below half-time or you graduate.
The grace period allows borrowers time to select a repayment plan and budget to repay student debt. You can also explore income-driven repayment options.
Private student loans may have grace periods. Sallie Mae is one of the most popular student private brother loan lenders that offers a grace period. The grace period is similar to federal student loans and lasts six months after you graduate or leave school.
To inquire about grace periods and when they apply, you can contact your private student loan lender. You should understand whether interest accrues during grace periods for private student loans.
How to use the student loan grace period
You are not required to make payments during your loan grace period. However, you can choose to pay the interest or any other amount. Paying interest has the advantage that it can be prevented from being capitalized or added to your loan balance.
The following checklist will help you make the most out of your grace period if you are graduating or leaving school soon.
1. Find out what you can afford
Six months can fly by fast, so it is important to be able to budget for your student loans. The grace period gives you the opportunity to set up a budget if you don’t have one.
Take a look at your monthly income. Next, subtract your monthly expenses from the amount you earn (or expect to earn) once you get a job. This will give you an idea of how much you can afford to pay for your loan payments.
2. Compare different loan repayment options
You may be eligible to one of the many payment plans if you have federal student loans. Borrowers typically have the option of choosing from:
- Repayments standard
- Repayments in graduated installments
- Extended repayment
- Repayments based on income
Standard repayment plans calculate your monthly payments using a 10-year repayment plan. For the whole ten years, you pay the same monthly amount. Gradual repayment follows the same 10-year repayment plan, but your monthly payments will increase over time. If you owe $30,000 in federal Direct Loans, you can extend your repayment period to up to 25 years.
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Income-driven plans are based on your household size and income. There are many options:
- Income-Based Repayment (IBR).
- Income-Contingent Repayment (ICR)
- Repayments that are income-sensitive
- Pay as You Earn (PAYE).
- Revised Pay as You Earn (REPAYE).
The income-driven repayment plans that you are eligible for will depend on your loan type, loan disbursement dates, household size and income.
Income-driven repayment has the advantage that your monthly payments may be lower. However, instead of repaying your loans in 10 years, you could be paying for 15 or 25 years. You’ll also pay more interest over the loan’s life than you would with a standard repayment plan.
Public Service Loan Forgiveness
You may get some of your loan debt forgiven at the end. You will need to sign up for an income-driven plan if you are interested in federal Public Service Loan Forgiveness.
On October 6, 2021, the Department of Education announced temporary changes to the Public Service Loan Forgiveness program (PSLF). This was in response to the coronavirus pandemic. Borrowers can now receive credit for past payments, regardless of whether they were made on time or for full amounts. Also, any payments made before the current iteration (PSLF) were not eligible for credit and count towards the 120 total payment amount.
Borrowers can also receive credit for past payment regardless of their loan program or payment plan. All loans must be federal student loans, or consolidated into direct loans by October 31, 2022.
Similar to previous requirements, borrowers must have worked for a qualifying employer at the time of prior payments. Qualifying employment status is any person employed by the government, 501 (c)(3) not for profit, or another not-for profit organization that provides a qualifying services.
The program has been updated to allow active-duty military personnel to count deferments or forbearance towards it. The new changes allow those who have previously applied for the PSLF to review their applications and request a reconsideration of their PSLF decision.
3. Look for an employer that offers student loans assistance
Consider whether your potential employer might offer student loan repayment assistance if you are entering the workforce for the first-time. About 48% of employers offer some kind of education assistance. This can include counseling, consolidation, student loan refinancing, or repayment programs.
Ask about student loan repayment assistance or refinancing when you are discussing benefits packages. When you negotiate a job, ask for assistance or forgiveness of student loan repayments if you are interested in being hired by a company.
4. Refinance or consolidation of loans is an option
Refinancing student loans, or consolidating them with existing student loans could make it easier to repay after the grace period. Consolidating federal loans into one Direct Consolidation loan is possible. Although this won’t lower your interest rate, it will allow you to make one monthly loan payment instead of multiple federal loans.
Refinancing is the process of taking out a private student loan to repay your existing loans. This serves two purposes: It reduces multiple loan payments to one and can potentially lower your interest rate.
However, refinancing federal student loans to a private loan could result in you losing certain federal protections. Federal protections such as temporary deferment and federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Act protections do not apply to private student loans. It is important to weigh the pros and cons of refinancing federal student loans with a private lender. A private loan will not allow you to repay federal student loans.