June 23, 2011

Repaying Student Loans

Congratulations Class of 2011! You finally got that college degree! What an exciting accomplishment. However, that moving-over-of-the-tassel means you’ll need to face your student loan sooner rather than later.

Typically, you get a six-month grace period after graduation before you need to begin the repayment process. But don’t wait until December to start considering your options. There are four main types of repayment plans for Federal Student Loans that apply to most student loans as well (if you filled out a FAFSA and then received money in the mail that you haven’t paid back, you have a federal loan).

  1. Standard Repayment: your payments would be relatively the same throughout the life of your loan (for federal loans this is 10 years). You will get a letter in the mail shortly after graduation with your monthly payment and interest rate. However, if you have a variable interest rate, your payments might fluctuate based on interest rate changes.
  2. Extended Repayment: this plan lengthens your repayment period, allowing you to make lower monthly payments. If you have a federal loan, your loan can be extended to 12 to 30 years, depending on the loan amount. However, you will end up paying more interest on the loan with this plan.
  3. Graduated Repayment: this allows you to make lower payments in the first few years of the loan and your payments will increase gradually over the duration of the loan. For example, many repayment plans allow you to only pay the interest for the first 2-4 years of the loan. However, the repayment period is the same as the standard repayment method (federal loans are 12 to 30 years, depending on the total amount borrowed).
  4. Income Contingent Repayment: this plan is based on your income. It is recalculated each year depending on your income: if your income is low, your monthly payment will be also. However, if you land an awesome job and your pay increases, your monthly payment will also increase. For federal loans, the loan term is up to 25 years and any remaining balance after that time is discharged.
  5. Forbearance: this allows you to reduce your payment amount, stop making payments temporarily or extend your repayment period. You lender will most likely ask you to provide documentation supporting this request. However, you still need to make interest payments while your loan is in forbearance.
  6. Deferment: this allows you to postpone your payments for a period of time. If you just graduated and haven’t made any student loan payments, your loan has been in deferment for the past four years (or 5 or 6 years depending on your “super senior” status). You can defer your student loan again under the following conditions:
  • You are enrolled in school at least half time (this is about 6 credits depending on the school)
  • You are actively seeking, but not able to find, employment
  • You have economic hardship

A Financial Alternative

If you have read through all of these options and realize that you don’t think you will have a well enough paying job by the time December rolls around, you might want to consider taking a couple classes and defer your student loan. Classes at community colleges are about $25 per credit, meaning you will only be paying $150 for the semester (if you take six credits/two classes) versus the $200 per month you might have to pay. That isn’t to say you should do this forever; once you have a full-time job, taking extra classes might  get in the way of your work rather than being an enjoyable learning experience.

Do you have any student loans? What kind of advice would you give to recent grads?

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