How to Handle Your Student Loans

Every year, as students graduate college to enter the real world, many leave with student loan debt. According to the Federal Reserve Board Survey of Consumer Finances, almost 19% of borrowers owe $50,000 or more (with 5.6 % owing over $100,000).

With a statistic like that, it can be daunting to think about repaying these loans, but there are options, and it’s wise to start planning right away.

If you’re a new graduate with student loans to take care of, consider taking these steps so you’re not overwhelmed by the debt:

 Take Advantage of Your Grace Period

With most loans, after graduation you have six months before the repayment period starts. Use this time to start planning and set aside money each month. If you know that you’ll be making monthly payments of $200, use the grace period to save enough money to pay for your first bill (and beyond). That could take a decent chunk out of your debt.

Know That You Have Options

Many loans offer different payment plans, and oftentimes you can switch your original plan to one that fits your financial situation at any given time. You might want to consider refinancing your loan to make lower payments without running the risk of default. Knowing what works best for your budget will help in the long run when making loan payments.

1. Income Based Repayment (IBR) and Income Contingent Repayment (ICR) Plans

Depending on your income, you can opt for an IBR or ICR. Both plans take into account how much you make each month and calculate your loan payments accordingly. These options will extend your payment plan up to 25 years—afterwards, any remaining balance is forgiven. The Income Based Repayment plan caps your monthly payments at 15% of your discretionary income, while an Income Contingent Repayment plan is calculated based on your adjusted gross income, family size, and overall amount of Federal Direct loans. Either choice is helpful for those with a smaller salary and who are unable to make large payments.

2. Pay-As-You-Earn

According to ConsumerFinance.gov, “For borrowers who qualify for PAYE, monthly loan payments will be two thirds of what they would be under IBR. Additionally, after 20 years of monthly payments, any remaining student loan balance is forgiven.”

If you choose Pay-As-You-Earn, your monthly payments will be capped at 10% of your discretionary income, making it one of the lowest repayment plans. It is, however, only available to people who were new borrowers on or after October 1, 2007, and who have received a loan disbursement on or after October 1, 2011. So if you’re part of the class of 2011 or earlier, you likely will not qualify.

To get an idea of what your monthly payments might look like, StudentLoans.gov has a handy repayment calculator. It gives you a snapshot of the amount you would pay each month depending on what plan you choose. This is a great tool to help you budget for your repayment period.

3. Deferments and Forbearance

If you’re unable to make payments, you might be able to apply for a temporary deferment. To be eligible for a deferment, or even forbearance, you must fit certain criteria. For more information and to see if you qualify, click here.

Living Within Your Means

You spent four years staying up late doing homework, and engaged in hard-core study sessions with ramen and cold pizza as your main source of nutrition. Now that you have your degree, you might feel like those days of being a “poor college student” are over; you deserve a break, right? Well, unless you’re fortunate enough to land a high paying job right out of school, you may want to continue your frugal lifestyle. You’re about to start making payments, which means you need to start budgeting. Paying off your student loan takes priority over frivolous spending, especially since it becomes part of your credit score. If you make smart decisions about your spending and create a budget now, then you’ll be in good shape to stay on track with your payments.

Consolidating Your Loans

If you have multiple loans, you might want to consider consolidating them to make a single payment each month. It’s easier to keep track of just one bill as opposed to several, and it helps you spend more effectively. The only downside to consolidating your loans is the potential for a longer repayment period and higher interest rates. You should speak with your loan officer to see if this is a good option for you, and click here for more information on specific loan consolidation plans.

Gathering information and planning ahead is a step in the right direction to paying off your student loans. Don’t let it overwhelm you. If you figure out early on what’s the best way to make payments, then you’ve set yourself on a great path toward being debt free.

About the author:  Jessica Gibbs studied Apparel Merchandising and Communications/Journalism at Colorado State University. She is currently a guest writer for CollegeFocus, a website dedicated to helping students deal with the challenges of college, including housing, finance, style, health, relationships, and transferring from a community college to a four-year university.

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