Alanna Ritchie is a content writer for Debt.org, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College. Join our Debt.org Google+ Community
As you fill out your intent to graduate forms and begin looking into the post-college future, your stomach might start to turn. You might start to panic and it may become difficult to breathe as you start imagining your monthly student loan payments. Stop, take a step back, BREATH, and let’s think about the situation.
But guess what? There’s good news!
Not only do you have a six month grace period after you leave school or drop below half-time attendance for your federal student loans, you also have numerous options for repayment plans. A grace period is a period of time after borrowers graduate, leave school, or drop below half-time enrollment where they are not required to make payments on certain federal student loans. Some federal student loans will accrue interest during the grace period, and if the interest is unpaid, it will be added to the principal balance of the loan when the repayment period begins. Repayment plans are designed to accommodate the needs of graduates entering the job market and receiving introductory salaries, while carrying the responsibility of handling additional bills, like rent, insurance, gas and groceries.
You do have options. If the standard ten-year plan with fixed payments is too much for you to handle, contact your lender to negotiate payments that match your budget. Not sure who your lender is? You can view all your federal loans and their lenders online from the National Student Loan Database.
Which Plan Meets Your Needs?
Federal student loans come with a variety of repayments plans that are offering based on requirements such as income, family size, or loan type. Examples of federal loans include Direct Loans or Federal Family Education Loans, which could be Subsidized Stafford loans, Unsubsidized Stafford loans, or PLUS loans. There are three main categories of repayment plans for you to consider.
First, the Graduated Repayment plan will allow you to begin making lower payments. Although, like the Standard plan, this plan must be completed in ten years, the lower payments gives you time to increase your salary. Every two years, your monthly payments will increase.
Second, if the Graduated plan is still more than you can afford, the Extended Plan allows you to take up to 25 years to repay loans. There is more flexibility with this option, as you can choose between a fixed or graduated payment.
Finally, there are four different repayment plans that consider your income as a factor. Some of these plans also consider factors like family size, spouse’s income, and total amount of loans. Although these have similar-sounding names, each has specific requirements and formulas which influence the monthly amount you will owe.
Four plans with income factors:
- Pay As Your Earn
- Revised Pay As You Earn (REPAYE)
- Income-Based Repayment
- Income-Contingent Repayment
- Income-Sensitive Repayment (FFEL Loans only)
Federal Loan Consolidation
While you are researching different payment cycles and methods, you may consider a Federal Loan Consolidation. A Federal Loan Consolidation allows you to merge all your Federal Student Loans into one loan. This can include your Subsidized Stafford Loan, Unsubsidized Stafford Loan, and Perkins loans. Once all your Federal Student Loans are merged into one loan, you will only have one monthly payment and one interest rate attributed to the loans. However, note that this will likely not reduce your overall interest rate since it is weighted by loan. As you can see, a Federal Consolidated Loan may allow for an easier way to manage monthly repayment.
How Can You Prepare Now?
Get in the habit of putting a portion of your paycheck in savings now, before you start paying back your loans. This will force you to make a budget and spend less every month, so when the time for repayment comes, it will be easier to part with this percentage of your paycheck.
The money you save up during your grace period can also be used as an emergency fund of accessible cash for unexpected situations. This cushion can enable you to afford your loan payments even when you have unexpected expenses such as a flat tire, broken arm or speeding ticket. Preparing yourself for the future can protect your loan debt from growing any larger.
Make sure your loan servicer has updated information, including your phone number and email. Your servicer will need this information in order to communicate any new information on your loans, including when your next bill is due.
Choosing a plan and taking a proactive approach with your finances can help you smoothly adjust into your repayment period.