In 2016, 1.1 million people defaulted on their student loans, according to U.S. Department of Education and analyzed by the Consumer Federation of America data. In other words, more than one million graduates are 270 or more days late on their payments. Their balances total $137.4 billion, a 14 percent increase from 2015.
The average graduate in 2016 left higher education with more than $37,000 in student debt, according to Student Loan Hero. This higher level of debt often results in people delaying major life events such as purchasing a home, grad school, getting married and saving for retirement, according to a study by Bankrate.
Starting your postgraduate life with debt is now the norm. It’s important that students fully understand how they should approach student debt in order to successfully pay it off. Here’s the foundation of what every graduate should understand about their education debt:
Understand your grace period
Federal student loans don’t require the first payment until six months after graduation, theoretically giving you time to adjust to post-grad life and secure a job.
If you had private loans, your grace period could be different. Check with your loan provider to determine how long you have until you need to start making payments.
Just because you have six months to start, it doesn’t mean you can’t start making payments during the six months after graduation. If you can afford it, the sooner you start the better. Depending on the loan, you may be accruing interest during your grace period so be sure to take steps to understand how your lender handles grace periods.
Determine how much you owe
Before you begin paying off your loans, find out how much you owe. For federal student loans, your best resource is the National Student Loan Data System. Here, you can find out important information like:
- How much you owe
- Whether your loans are subsidized or unsubsidized
- Contact information for the company to direct payments
Then, contact your student loan servicer (the company to which you’ll make payments) and find out when your first payment is due and how much they expect at that time.
If you have private student loans, contact your loan provider to find out the exact amount you’re expected to pay and their requirements for payment.
Create a budget
Forming a budget will help you visualize how much income you’re bringing home and how you can divvy it up between necessary expenses, like your student loans, housing expenses, groceries, utilities and more.
Include your student loan payments in your budget, even if you haven’t started paying down your balance. This will help you determine how much you can afford each month and identify areas where you can cut back to increase your loan payments.
Creating a budget and including your loan payments can also help you determine whether you would benefit from enrolling in a repayment plan that’s based on your income and family size or refinancing your loans.
Begin interest payments
For any loan, there are two types of payment: principal and interest. The principal is the amount you initially borrowed. Interest is calculated using your principal and interest rate.
Subsidized loans don’t accrue interest while you’re in school or during the six-month grace period. The only exception is for loans taken out between July 1, 2012 and June 30, 2014; these loans accrued interest during the grace period, according to Federal Student Aid.
Unsubsidized loans began accruing interest from the day you took them out, even while you were in school and during the grace period.
The interest you accrue is added to your balance each month. The following month, your interest added is based on your total balance, including the amount in interest you added previously.
Identify the repayment program that suits you
Basic federal student loan repayment plans
The standard plan is the default plan. You’ll pay the same monthly amount for 10 years. This plan accrues the least interest overall, but your monthly payments could be high.
The graduated plan is also a 10-year schedule. Your monthly payments will start smaller and gradually increase.
The extended plan is a 25-year plan that has smaller monthly payments but accrues more interest.
Student loan repayment plans for government and nonprofit employees
Public Service Loan Forgiveness is available to nonprofit or government employees. After you make 120 qualifying loan payments (that’s once monthly for 10 years), the remaining balance is forgiven, tax-free. All or most of the 120 payments should be completed through an income-driven repayment plan (otherwise, you’ll pay off your balance before you’re eligible for forgiveness).
Income-driven federal student loan repayment plans
The Income-Based Repayment plan ensures you never pay more than 10 to 15 percent of your discretionary income and lasts 20 to 25 years.
The Pay As You Earn plan caps your payments at 10 percent of your discretionary income and is a 20-year-long plan.
Eligibility for both of these programs is based on your income and your outstanding debt.
The Income-Contingent Repayment plan caps your payments at 20 percent of your discretionary income and is a 25-year-long plan. It’s the only income-driven plan for those who took out parent PLUS loans.
The Revised Pay As You Earn plan ensures you won’t pay more than 10 percent of your discretionary income and takes 20 to 25 years to pay off your loans. All borrowers with an eligible federal loan can use this plan.
You can find out everything you need to know about these types of payment plans here from studentaid.ed.gov.
To enroll in an income-driven repayment plan, you’ll need to fill out an application, available through your student loan servicer or studentloans.gov. Information about your income and family size is required; add this information electronically using the IRS Data Retrieval Tool, or include your federal income tax return or an IRS tax return transcript in your paper application.
You’re also responsible for re-applying on an annual basis.
Repayment options for private student loans
If you have private student loans, your options are much fewer than when working with federal loans. One option for many graduates is a loan refinance.
Speak with your lender or credit union to review your options. It’s generally best to pursue a loan refinance only if you’ll wind up with a lower interest rate, a longer term, or both; if you don’t, it may not save you money. Do you need more help getting your finances in order? Check out this 6-step plan.