Five tips to prepare college graduates to repay student loans

So, you’re graduating from college and ready to enter the workforce. If you’re not going on to graduate school immediately, you no doubt have been thinking about what kinds of jobs you’ll look for. If you’ve taken on student loans, you’ll also need to start planning for making payments on them.

Once you graduate, you have a six-month grace period where no loan payments are due. This period is an ideal time to start preparing to manage your loans. Here are five tips that can help prepare you.

1)  Learn the Details About Your Loans

You might not know yet what your post-college salary or monthly expenses will be. Still, you can get started by making the following list.

• The types of student loans you have, organized in three categories: subsidized federal loans, unsubsidized federal loans and private loans.
• The total amounts you owe. You’ll want to calculate your private loans separately from your federal loans because you never want to consolidate the two, should you ever decide to consolidate.
• The interest rates on the loans.
• The terms and conditions of the loans.

Project what a potential payment might be. Studentaid.gov has an online calculator to for federal loans; Finaid.org can be used for both federal and private loans.

2)  Start an Emergency Savings Fund

Start saving early and often – even with as little as $25/month – and treat it as a monthly expense. This fund can pay for unexpected medical bills, automobile repairs and other emergency expenses, or it can help cover your loan payment temporarily if you’re struggling to afford the payments.

3)  Familiarize Yourself with Repayment Options

Ask your lender what kinds of repayment options might be available for your private student loans. For federal loans, there are several different ways to repay.

The first group of options for federal loans are Time-Based Repayment Plans. Under these plans, the borrower’s income is not relevant to the payment amount; instead, the loan is repaid over a designated length of time. These plans have no loan forgiveness options.

• Standard Repayment Plan: This is the default payment plan, unless the borrower chooses otherwise. It is usually a 10-year plan with a fixed payment amount.
• Graduated Repayment Plan: This is also normally a 10-year repayment plan. Unlike the Standard Repayment Plan, payments under this plan start out low and generally increase every two years.
• Extended Repayment Plan: This plan is similar to Standard and Graduated plans, in which either the payment is fixed or increases incrementally. However, the repayment period is extended to 25 years. To be eligible for an extended repayment option, the borrower must owe at least $30,000 on Direct Federal Student loans.

The second group of federal repayment plans are the Income Driven Repayment (IDR) Plans. With these plans, the payment amount is based on the borrower’s income. Under certain circumstances, there is also an opportunity to receive loan forgiveness. This means any amount remaining on the loan would be eliminated after a specific time frame and number of payments made.

• Revised Pay As You Earn Repayment Plan (REPAYE): The monthly payment is set by calculating 10% of the borrower’s household “discretionary” income. Discretionary income is determined by taking the Federal Poverty Level for the borrower’s area and family size, multiplying that by 1.5 (150%), and subtracting that figure from the household adjusted gross income. Forgiveness of any loan balance will happen after 20 years of payments for borrowers with only undergrad loans and 25 years for those with graduate loans.
• Pay As You Earn Repayment Plan (PAYE): The standard used to calculate PAYE payment amount is also 10% of discretionary income. This figure will never be more than what the total Standard Repayment Plan amount would be over 10 years. After 20 years of payments, the remaining loan balance would be forgiven. To be eligible for PAYE, you must either: 1) have no outstanding balance on a federal loan on or after October 1, 2007; or 2) have received a disbursement of a Direct Loan on or after October 1, 2011.
• Income-Based Repayment Plan (IBR): The monthly payment is calculated at either 10% or 15% of discretionary income, depending on when the loans were originated. Like PAYE, IBR plans will not be more than the Standard Repayment Plan amount over 10 years. Forgiveness on loans would occur after either 20 or 25 years, again depending on the loan origination date.
• Income-Contingent Repayment Plan (ICR): The payment is based on either 20% of discretionary income or the amount the borrower would have paid with a fixed repayment plan over 12 years, whichever is lower. Any remaining balance after 25 years of repayment will be forgiven. The ICR is the only type of IDR offered for Parent Plus Loans.

If you have a job already, you can calculate what your loan payments would be under the different plans with one of the calculators listed under #1 above. If you’re not employed but know what kind of job you want to have after college, see what the average entry level salary is for that profession. Then use the calculators to estimate your payments.

4)  Learn About Student Loan Forgiveness and Payment Assistance

Eligibility for these programs depends on several factors, including your profession, the place you work, your repayment plan and the type of loan you have. Some loan forgiveness programs include:

• Public Service Loan Forgiveness Program (PSLF): This is available for employees of federal, state, local or tribal governments or not-for-profit organization. You must be working at least 30 hours per week for these employers. This program forgives the remaining balance on your Direct Loans, without tax consequences, after you have made 120 qualifying monthly payments under an IDR plan.
• Teacher Loan Forgiveness: This provides for up to $17,500 in forgiveness on your Direct Subsidized and Unsubsidized Loans and Subsidized and Unsubsidized Federal Stafford Loans. You must teach full-time for five complete and consecutive academic years in a low-income school or educational service agency and meet other qualifications.
• National Health Service Corps (NHSC) Loan Repayment Program: A program for licensed providers of primary medical care, dentistry and mental health. In order to be eligible for loan forgiveness, individuals must practice in certain disciplines and specialties and serve at least two years at an NHSC-approved site.
• AmeriCorps: This voluntary federal program engages adults in public service work in the United States that meets critical needs in local communities. AmeriCorps volunteers who complete a year of service are eligible for a Siegal Education Award, which can be used to pay down existing student loans.
• Peace Corps: Like AmeriCorps, the Peace Corps is a service opportunity to meet critical in a community, but the service is done in other nations. After completing their service, Peace Corps volunteers might be eligible for forgiveness of between 15% and 70% of their student loans. They could also receive credit towards 120 qualifying payments as part of Public Service Loan Forgiveness. If you are accepted as a volunteer, the Peace Corps recommends you contact your lender as soon as possible.

These programs are only a few of the options available for you. You may be able to find loan forgiveness available for other professions and criteria.

5)  Begin Chipping Away at the Interest Now

If you have a job, use a small portion of your income (i.e. $10 to $20 a month) to the pay the interest accruing on your unsubsidized federal and private student loans. Contact your servicer to start this process. Focus on the loan with the highest interest rate.

LSS Financial Counseling has counselors who can work with you to look at your repayment options and create a plan to pay off your student loans. Contact us for a free, confidential appointment at 888.577.2227. If you’re in the grace period now, it’s the perfect time to create a realistic budget and determine your payment options. Don’t wait – contact LSS today!

Author Ray McCoy is a Certified Financial Counselor for LSS Financial Counseling.