The years of stressing over exams and research papers might be over for college graduates, but there’s still some anxiety to deal with: 71% left school with student loan debt.
How are you going pay it back?
The average 2016 college graduate owes $37,172 in student loans. Their grace period (six months after graduation, the first payment is due) is over so it’s time to find an affordable plan that suits your income. The choices are plentiful, but so are the consequences if you make the wrong choice.
There are 44 million borrowers in the student loan program, but only 36% of them (15.7 million) are current in repaying the loan. Another 3.9 million are in default, meaning they haven’t made a payment in more than 270 days. Many are postponing the inevitable by falling back on deferment (3.4 million) or forbearance (2.7 million) while they search for a way to repay the loans.
The problem is that most students don’t plan ahead for repayment. In fact, many simply default into a repayment program rather than discussing options with their parents, loan officers at their school or a credit counseling service.
Standard Repayment Plan Top Choice
The most popular repayment choice – often by default – is called the Standard Repayment Plan (SRP). That’s a 10-year program in which borrowers pay a fixed amount for 120 consecutive months.
If you don’t enroll in another of the many payment options during your six month grace period, you will default to the SRP.
According to LendEDU, more than 11.2 million borrowers use the Standard Repayment Plan, making it by far the most popular choice (or default) among student borrowers. The second most-popular is the Income Based Repayment Plan, with 3.1 million borrowers.
The SRP suits a lot of graduates because it’s a fixed amount with definitive start and finish date. However, if you don’t find a decent-paying job immediately, the monthly payments may be too high the first few years out of school. The average payment for borrowers ages 20-30 years old is $351 a month.
There are plenty of alternatives, but it takes a little research and planning to find the one right for you.
The first step is to create a monthly budget of income and expenses to help find out what you can afford. Subtract the expenses from your income and whatever is left is how much you have available to pay your loans.
It might be a lot if you’re among those receiving the average salary for 2016 graduates of $50,556. It might not be much – or even zero! – if you’re a teacher, whose average starting salary is just $34,891, or worse than that, haven’t found a job yet.
Whatever it is, take that figure and go to the Repayment Estimator at www.studentloans.gov. Fill out the questionnaire and the site will tell you which of the many repayment plans you qualify for and even give you a chart for the monthly payment for each plan.
If you don’t have the time or inclination to wander into the maze of choices available on the government site, you can click on www.incharge.org/understanding-debt/student and someone will show you the programs you qualify for and the monthly payments you would have to make enrolling in them.
Income Driven Repayment Programs
The federal government offers several alternatives to the Standard Repayment Plan and divides them into two categories: income-driven repayment plans and basic repayment plans.
If you choose an income-driven repayment (IDR) plan, you could extend your loan term from 10 years to 20 or even 25 years. The IDRs determine your monthly payment by a percentage of your income and size of your family. Your payments will be more manageable month-to-month, but you will end up paying more overall for the loan because of the added years.
There are five types of IDRs. These plans best serve those who have a lot of student debt and not a lot of income coming out of college.
- Pay as you earn (PAYE)
- Revised pay as you earn (REPAYE)
- Income-based (IBR)
- Income-contingent (ICR)
- Income sensitive
It is important to note that you must re-apply for IDRs every year. Your payments could go up or down because of a change in income or family size. IDRs do offer loan forgiveness programs if you haven’t paid off your balance by the end of your term, but only if you remain current on payments every month.
If you have a Federal Family Education Loan (FFEL), you may qualify for an income-sensitive repayment program.
This program is aimed at low-income borrowers, who have organized a budget and know exactly how much they can afford to pay each month. Borrowers submit tax returns or pay stubs to establish exactly what their income is and help determine the amount they can afford to pay.
The borrower can choose to use anywhere between 4% and 25% of his or her income to be the required monthly payment.
Go to the Department of Education’s website or contact your loan servicer to enroll in one of these repayment plans.