The Complete Guide to Paying Back Student Loans
You worked hard to get accepted to college, studied for four years, and finally have your degree. Now what? If you’re like most college graduates, you’re probably busy searching for jobs, finding the perfect apartment, or planning a celebratory vacation.
But, there’s one more life event you need to start planning for right away – paying back your student loans. While this part of the equation isn’t nearly as fun to think about, how you handle your student loans can make a huge impact on your future.
When Do You Start Paying Back Student Loans?
The first step to coming up with a student loan strategy is figuring out when your first payment is due. Fortunately, most student loans offer a grace period of six months. Usually, your six-month grace period begins when you graduate college, drop out, or become a part-time student. This adjustment period gives you time to find a job and start earning money before you must begin paying back student loans.
The following loan types usually offer a six-month grace period:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Some Private Student Loans
Various other types of student loans come with their own conditions, and some offer no grace period at all. Federal Perkins Loans, for example, come with a variable grace period and repayment terms that depend on when the loan was dispersed. PLUS loans, on the other hand, don’t offer a grace period and need to be repaid right away.
Before you start planning your repayment strategy, make sure you know when your first loan payment is due. While you might have some time to get your ducks in a row, having a first due date in mind can make planning easier.
How Much is My Monthly Payment?
Another factor you should carefully consider is how much you’ll owe each month. The amount of your student loan payment depends on several factors, including the total of your loans, your interest rate, and which type of payment plan you’re on.
While most student loans are repaid with a standard, ten-year repayment timeline, extended and income-based repayment plans can last up to 25 years.
Make sure you understand your student loan amortization schedule and know how much your student loan payment will be so you can plan accordingly. If you’re unsure and want to get an estimate, a loan payment calculator can help.
Can I Pay More?
If you want to get out of debt as quickly as possible, paying more than the minimum payment on your student loans is a smart idea. By making extra payments, you can reduce your loan’s principal, pay off your loan faster, and save money over time.
Fortunately, there are no penalties for prepaying your student loans early. The biggest hardship you’ll face is getting your student loan servicer to apply your prepayments correctly. Make sure to check with your loan servicer to find out the best way to make extra payments on your loans.
How Do I Make My Payment?
Once your grace period is over or your loans are otherwise due, it’s your responsibility to get your check or payment to the appropriate loan servicer. If you’re unsure where to send your payment, read through your loan paperwork or check with your school’s financial aid office. You can also find details on your loans through the National Student Loan Data System, which is run by the federal government.
Ideally, your student loan servicer will send you a bill or a stack of payment coupons you can use to make your student loan payment every month. However, you’re responsible for repayment whether your loan servicer contacts you or not. This is one of the reasons it’s so important to know when your first payment is due. The bottom line: Your loans are your responsibility regardless of what your lender does.
What Happens if I Can’t Make Payments?
While you will hopefully be able to repay your loans right away, this isn’t always the case. Life happens, and it’s common for new graduates to face struggles as their loans come due.
Fortunately, not being able to repay your loans promptly isn’t the end of the world. You do have options, including:
Income-driven repayment plans
Income-driven repayment plans offer relief for graduates who struggle to make the minimum payments on their student loans. These plans include Income Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay as You Earn (PAYE), and Revised Pay as You Earn (REPAYE). While each of these programs has their own unique details, they all let you pay a percentage of your “discretionary income” for 20-25 years before resulting in forgiveness of your loans.
Deferment and Forbearance
Deferment allows you to temporarily stop making payments on federal student loans or reduce the amount you pay for a limited time. If you qualify for deferment, you may not be responsible for the interest that accrues on your loans during the deferment period, either.
Forbearance is like deferment in the fact it allows you to temporarily stop making payments or reduce the amount you owe on federal loans. With forbearance, on the other hand, you are responsible for interest that accrues on your loans while you’re not paying payments. Because of this, forbearance should only be considered if you can’t qualify for deferment.
Extended Repayment Plans
If you think you can afford to repay your loans in their entirety but need additional time, extended repayment plans can help. According to the U.S. Department of Education, it’s possible to extend your repayment period to up to 25 years. With this option, you’ll pay a smaller loan payment every month, but for a much longer stretch of time. Because of the increased timeline, however, you can expect to pay a lot more interest on your loans.
What Happens if I Default?
While none of these options are ideal, it’s crucial that you never default on your student loans. Avoiding your loans comes with important financial consequences that could last for decades or longer.
Here’s what can happen if you don’t repay your loans:
- Late payments will show up on your credit report, damaging your credit score in the process.
- The federal government can garnish your wages if you refuse to pay your loans
- You may incur penalties on your loans. These penalties can add a significant sum of money to the amount of money you owe.
No matter what, you’re always better off dealing with your loans head-on. Keep in mind that student loans never disappear and are almost impossible to discharge in bankruptcy. If you’re struggling with student loan debt, the best step to take is to contact your loan issuer or sign up for a repayment program that’s easier to handle.
What Other Options Do I Have?
Believe it or not, there are certain situations where you can cancel your student loans altogether. If your school closes while you’re a student, your college denied your refund, someone stole your identity, or you become permanently disabled, you may be able to wipe your loan slate clean.
Beyond those extreme circumstances, however, there is little you can do beyond negotiating monthly payments you can afford.
If you’re feeling frustrated, it’s important to remember that certain programs lead to loan forgiveness in the very end. With income-driven repayment programs like IBR and PAYE, for example, your full loan balances may be forgiven if you qualify and make payments for up to 25 years.
Also, remember you may qualify for loan repayment grants and other forgiveness programs depending on your career trajectory and the type of loans you have. With Public Service Loan Forgiveness (PSLF), for example, you may have your loans forgiven if you work in a qualified public service position and make payments for ten years.
As a last resort, you may also want to consider refinancing or consolidating your student loans with a private lender. While this won’t make your loan balance disappear, you can save money if you refinance your existing loans into a new loan with a lower interest rate and better terms.
Make sure to check up on these options and others as you search for ways to move forward in life without neglecting your loans. While you can put off the pain for a little while, all student loans must be dealt with one way or another.