The grace period on student loans is about to expire for recent graduates. And while the idea of being able to pay off that debt may seem impossible right now for people who were in college just six months ago, the more you know about the process and your different options, the better off you’ll be!
5 things to know about paying off your student loans
1. When you have to start making payments
Student loan payments typically kick in six months after a student has graduated, dropped below half-time or stopped attending school for whatever reason. But this grace period varies, depending on the type of loan you have. For example, the repayment period for federal Direct PLUS loans begins the day after the final disbursement is made. If you have private student loans, the repayment period depends on your specific loan, so make sure to contact your loan provider to find out exactly when your payments are set to begin.
You don’t want to be surprised by a payment notification in the mail. Knowing when your payments begin can help you get your budget in order — plus, you can look into your repayment options before the first bill arrives.
2. Your repayment and loan forgiveness options
Ideally, a recent grad will have found a job by now and already started to save. But for many people, that’s not the case — or they aren’t making nearly enough money to cover their monthly student loan payments. So know this — you do have options!
There is a lot of help available for students who limited their borrowing to federal student loan programs.
Under the Pay As You Earn repayment (PAYE) program, your monthly payments on federal loans will be capped at 10% of your income. In addition, your outstanding debt is forgiven after 20 years of on-time payments. To see if you’re eligible for Pay As You Earn, visit the Education Department’s website at StudentLoans.gov.
While this option has only been open to people who took out loans after October 2007, a new expansion of the PAYE program will soon be available to more people! Beginning in December of this year, all federal student loans will be eligible for the PAYE program, regardless of when you took them out. Get more information here.
In addition to repayment options, there are also ways to have your student loans forgiven. Public service employees can qualify for full loan forgiveness after making 10 years of monthly payments on their federal student loans.
Read more: New ways to pay off student loan debt
Here’s a list of the public service fields that will qualify for loan forgiveness. Ask your loan servicer for complete details about how to take advantage of this generous program:
- Government, military service, emergency management, public safety, law enforcement, public health, public education. (In addition, military personnel on active duty will be able to defer payments on their loans, and service members who are returning to civilian life will be able to defer payments for more than a year).
- Social work in a public child- or family-service agency; public interest law services, including prosecution or public defense or legal advocacy in low-income communities for a nonprofit organization; public child care; public service for individuals with disabilities; public service for the elderly.
- Public library sciences, school-based library sciences and other school-based services.
- Certain employees at nonprofit groups, as defined by the tax code, and full-time faculty members at tribal colleges or universities.
But note this well: Under the tax code as it’s written now, you will have to pay tax on any amount that’s forgiven. That will still be much less than what you would have paid in loans, but it is important to mention! Get more details in Clark’s Student Loan Guide.
Unfortunately, there aren’t a ton of options available for people with private student loans — which is partly why Clark advises against them. But, more refinancing options have become available over the past few years.
One new option for refinancing your private student loans is to do so through a credit union. Visit CUStudentLoans.com to see what’s available. You may be able to save a substantial amount of interest!
3. Consequences of late or missed payments
Many recent graduates don’t realize the impact that late payments can have on their credit score. Your credit score impacts several aspects of your life — especially when it comes to locking in good interest rates — particularly when it comes time to buy a home or a car. And while that may not seem relevant to a recent grad, it’s important to know that a bad credit history can follow you around for quite a while — and can make those future purchases (even years from now) much more difficult, sometimes even impossible.
Read more: Understanding a good credit score
Failing to make your student loan payments on time can seriously damage your credit score. If you can’t make the payments, look into your repayment options listed above, or talk to your loan provider about other ways to get your monthly payments reduced.
Set a reminder for when your payments are due each month so you don’t miss any. If you’re on a tight budget, setting up automatic payments could cause you to overdraw your account. So setting up calendar reminders — on your smartphone, laptop, whatever you use the most — for all of your monthly payments may be the best way to stay on top of everything.
4. The importance of budgeting
Starting to budget after college can be tough, but it’s so important for both your current and future financial health. Even if you’re barely makes ends meet and still living in your parents’ basement, taking the time to budget your spending — and understand your finances — will make your life easier now and later.
With student loan payments looming, it’s important to track your expenses and determine how much you can comfortably spend on essentials like housing, transportation, food etc. — and still be able to make your loan payments when they kick in. Keeping up with your expenses will also allow you to identify areas where you can cut back on unnecessary spending.
Budgeting apps make tracking your monthly expenses very easy. Here are a few to consider:
Level Money: Keeps track of your spending and gives you a sense of how you’re doing. If you’re looking for a free app to take your financial temperature all the time, this is it. This app is great for recent graduates who probably don’t have a very complicated financial life and just need some help staying on top of their spending.
5. You can still save, too!
It’s important to continue saving for the future even when your student loan payments kick in. And if you haven’t started saving, you should start now. The interest rates on most student loans are pretty low, so you’re better off making your monthly payments and saving at the same time. Having money saved up can give you a lot more flexibility in your life — now and down the road.
Once you start tracking your expenses and get a budget in place, you will be able to identify areas where you can reduce your spending and then save that extra money. Having some money in savings can be a life-saver when something unexpected comes up — such as a job loss or health issue. Plus, saving over time for a big purchase can make that expense a lot easier on your wallet when the time comes — instead of taking out a big chunk of your budget all at once.
When it comes to an emergency fund, try to have at least three months of income saved in an account you can easily access — such as a savings account — in case of an unexpected job loss, health issue or any other situation in which you will need quick access to cash in order to cover your monthly expenses.
Budgeting will help you allocate extra money each month toward your savings — allowing you to put money away toward an emergency fund, a future big purchase and retirement.
One of the easiest ways to kick-start your retirement savings is through your 401(k) program at work. If your employer offers a match, try to contribute at least enough to get that employer match — it’s free money!
Here are some more tips on how to get started.