With your six month grace period coming to an end, you will have to start paying back your student loans.
Wow, it’s been six months since you graduated from college, can you believe it? It feels like just yesterday you were walking across that stage and receiving your diploma after four hard years of work. Some of you might already have a full-time job, some might still be working side gigs to get by, and others might be completely unemployed.
No matter your current work or financial situation, one thing is for sure: your student loan payments are starting. That’s right, most loans have a six month grace period, so come November or December, you’ll have to start making monthly payments towards your student loan debt.
You might be scared when you first realize how much you actually owe and how much you have to pay every month, but don’t panic! We’ll go over some ways to help you cope with your new student loan payments.
Determine how much you owe
If you have federal loans, you’ll be able to see your loan breakdown easily. The National Student Loan Data System is the place to go for all of your student loan data. This is the best way to get a breakdown of all your loans and then, determine the best way to tackle them. If you have federal loans, you will most likely have multiple loans rather than one huge loan.
If you have private loans, it can be a little more challenging to figure out your balance. There is no direct database for private loans that breaks down everything in detail. Start by contacting your original lender. If this is not an option, you can contact your school’s financial aid office for this information. After you get all of the information you can, contact each private lender for the breakdown of your loans and figure out a plan of action for how to pay them off.
Determining your repayment options
There are different plans available for paying off your student loans. Make sure to carefully go over all of the plans and decide, based on your lifestyle, which repayment plan is best for you.
- Standard repayment plan: Most people opt for the standard repayment plan, which is the same monthly payment over the course of ten years. This plan works for most because they are able to schedule it into their monthly budget since the payment is the same amount each month.
- Graduated repayment plan: If you need lower payments when you first start off this plan is a good option for you. Your monthly payments will start off low and increase every two years. Be aware that your payments will be going towards interest at first and not the principal.
- Income-Based repayment plan: These monthly payments are between 10-20% of your income after taxes. Payments can be substantially smaller and they can change annually. It is important to note that your loan term will be extended to 20 or 25 years.
- Extended repayment plan: Similar to the standard repayment plan, you will have to pay a certain amount every month, but you will be paying over 12-30 years rather than the standard 10 year plan. Although your payments will be smaller, you will be paying off your loans for a considerably longer period of time.
- Income-Contingent repayment plan: This plan is based on your income and the amount of debt you have. Your monthly payment is adjusted each year based on your income. This loan is up to 25 years and, at the end of that time, what is left of your loan will be discharged, but that amount will then be treated as taxable income and you will have to pay income taxes on it for 25 years.
What happens if I didn’t budget for my student loans during the grace period?
Once again, don’t panic! This is a common mistake of recent graduates. You just graduated college and you might not have started looking for a job right away. As soon as you receive your first letter in the mail from your student loan provider, start thinking about a budget. The sooner you implement a budget into your life, the better off you will be when you need to start repaying your loans.
If you’re short on cash before your first payment is due, take a few no spend weekends to bolster your cash flow. Once you get into the routine of having and following a budget, your monthly payment will become easier. It’s crucial that you are paying at least the minimum every month. To ensure this your loans should take priority in your monthly budget.
What about consolidation and refinancing?
Consolidating your loans means you are combining all of your student loans together into one new loan rather than having a few smaller loans. This new loan is a weighted average of your old loans’ rates. You will have one repayment schedule for your new loan and you can potentially lower your monthly payment. Although you will have a lower monthly payment, you will also be lengthening your terms. As a result, you will have to pay more interest over the life of your loan.
Refinancing your student loans is when a new loan is used to pay off your existing loans. If you are in a better financial situation now than when you were when you first applied for your student loans, you may be eligible for refinancing. If you choose to refinance you will be combining all of your loans into one single private loan. You can put all of your loans, federal or private, into this one new loan, but the loan now becomes a private loan and you lose all of the benefits of federal loans, such as different repayment options. The benefits to refinancing can include a lower monthly payment, shorter loan term, and you’ll save money on total interest. If you’re okay with all of your loans becoming private loans, then refinancing might be an option to look into.
Overachiever? What to do with extra cash.
If you find yourself on the receiving end of a raise or bonus at work, put it to good use by controlling your urge to spend it on a vacation or fritter it away with lifestyle inflation. Keep your lifestyle where it is and funnel the extra cash directly towards the principal of your loan. You’ll shorten the life of your loan and save on interest in the long term. Your future self will thank you.
As if the Holiday Season isn’t stressful enough, many recent graduates are also starting to pay off their student loans this month. The first payment (and most likely the second one too) will feel like a hit to your bank account. If you learn to budget and keep a close eye on your finances, you will smoothly transition to making your loans a top priority.