You've graduated from college with a new degree and lots -- a whole lot -- of student-loan debt. The good news is that depending on the type of loans you have outstanding, you'll have several ways to repay them.
You might choose to set up a standard repayment plan, paying off your student loans over a set period. Alternatively, maybe you'll set up a plan that allows you to vary your payments -- hiking them or shrinking them -- depending on your gross monthly income levels.
Before you enter the real world of jobs, rents and household budgets, you’ll need to determine exactly how you’ll repay your student loans. It is one of the most important decisions you can make for your financial health.
Loan types
Before you start to repay their loans, you need to know exactly what kind of loans you have.
Federal loans come with the most flexible repayment options. Private loans, made by private companies, come with the fewest. In fact, private student loans are like any other kind of loans, such as a car loan or mortgage. Students will have to pay them back by making a specific payment each month for a set number of years. These loans usually don't offer any payment flexibility for students who are struggling with their finances or who have not found stable, well-paying jobs.
Loans provided by the federal government, though, do take into account outside factors. There are two main types of federal loans. Federal Direct loans are made directly by the federal government. Federal Family Education Loans are made by private lenders on behalf of the federal government. If you default on these loans, the federal government will cover any losses that private lenders would suffer.
You might also have taken out federal loans issued directly by the college that you attended. These loans, too, often come with flexible repayment plans. Students, though, will have to check with their individual schools to determine their repayment options.
Plans
So, what repayment plan ranks as the best choice for you? This depends on your financial and job situation.
The payment plan that makes the most financial sense is the standard repayment plan. Under such a plan, graduates make payments for as many as ten years, paying off their student loan debt gradually. Under such a plan, graduates might face higher monthly payments. However, in the long run, you'll be paying less. That is because graduates who pay their loans back under standard repayment plans pay far less interest. This, then, is the cheapest way to pay off student loan debt.
However, what if you do not have much money now? This is not unusual. Many students graduate college with a solid degree but can only find entry level work, even in their chosen field. During these early years after graduation, their gross monthly income is low.
However, as these graduates rise through the ranks in their field, their income steadily grows. What was once a pittance becomes solid and, sometimes even great pay. Suddenly, these graduates are no longer struggling financially.
The best loan repayment option for such students might be the graduated repayment plan. Under this plan, monthly payments start out low. They then rise after a certain period, often every two years. Again, this is a good option for graduates who are certain that their incomes will steadily rise. However, because payments start out lower, graduates will be paying more interest over the life of the loan.
You might also consider an extended repayment plan. This plan gives students a longer time to repay their loans, often for as long as 25 years. It is an option for those graduates whose income is simply too low for a larger payment. There is a limit on this type of plan, though: Graduates are only eligible for it if they owe more than $30,000 on their student loans.
Graduates who are financially struggling might qualify for one of the several available hardship repayment plans. The Income Contingent Repayment Plan, for instance, allows graduates to make lower payments -- maybe even no payment -- if their incomes are especially low. After 25 years, the government will cancel the amount the graduate still owes. There are some downsides, however. First, the IRS will consider any canceled student loan debt as taxable income. Secondly, graduates who make payments that are lower than their monthly accrued interest will see their loan's principal balance grow over time.
The Income Sensitive Repayment Plan allows graduates to make payments based on their annual income, the size of their families and their total loan amounts. The main difference from Income Contingent Repayment Plans? Graduates must send in a payment large enough to at least cover their loans' accruing interest. Graduates must also pay off their loans in 10 years.
Loan Consolidation
Those graduates who are in default on their student loans might find relief through the federal government's Direct Consolidation Loans program. This program allows graduates to consolidate their federal student loans into one larger loan. The new loan will come with several repayment options, including those based on a graduates' income, family size and ability to pay.
A loan consolidation, though, does come with some drawbacks. First, the interest rate on graduates' student loan debt might rise. Secondly, you might end up paying off your student loan debt over a longer period. This might cause you to pay more interest during the life of the loan than you would have paid if you had not gone through loan consolidation.
Before you make any decision on loan consolidation, you should talk with a financial planner or counselor. This professional will help you make the right decision and make sure that you do not fall for any consolidation scams.
Paying back student loans is not the easiest of tasks, especially not as college tuition continues to rise, and the country's unemployment rate remains stubbornly high. Those graduates, though, who know all their options are the ones who are most likely to make the right choice when it comes to repayment plans.