Congratulations to all recent graduates! You’ve reached an exciting milestone in your life, and now it’s onto adulthood. One of the first things a recent graduate should do is review their student loans. We all know how overwhelming student loans are, but the good news is that they don't have to be! There is a student loan strategy for everyone and the earlier you are aware of the best strategy for you the better. There are two main types of student loans, private and federal and your repayment strategies are going to depend on the type of loan you have, and what your ultimate goal is.
After graduation, or once you drop below half time enrollment status, your federal student loans, and sometimes private, will enter a grace period during which time no payments are required. Generally, this is a six month period and then your loans will enter the standard 10 year repayment plan, unless you make other elections. The monthly payments under the standard plan are generally 1% of your beginning loan balance for 10 years. There are other options though for repayment so it’s important to know what fits your individual needs.
If you have federal student loans and are entering a career in the nonprofit sector and plan on remaining in that sector for at least 10 years (it doesn’t have to be the same employer for the entire 10 years) check with your employer to see if they are eligible for Public Service Loan Forgiveness (PSLF). If you fit in that category and have a large amount of student loan debt you will likely want to consider PSLF. In order to receive PSLF you need to be on an income driven repayment plan, such as IBR, ICR, PAYE, or REPAYE and you will need to certify your income annually to determine your payment amount. PSLF requires 120 qualifying payments to be made, but these payments don’t need to be consecutive. After your 120 qualifying payments have been made you will need to certify your employment for the entire length of time. We recommend certifying your employment annually so that if you have a job change you don’t have to go back and contact all of your former employers. Once you have made your 120 qualifying payments and your employment has been verified your eligible federal students loans will be forgiven tax free!
Maybe you aren’t going to work in the public sector but still have a large amount of student loan debt in comparison to your income. If that is your case and you aren’t able to afford your monthly payments under the standard repayment plan you can still enter an income based repayment plan. It’s important to know that instead of the loans being forgiven in 10 years (120 payments), as they are with PSLF, it will be 20 - 25 years, depending on the payment plan. If you elect this type of loan forgiveness it’s also very important to know that your forgiven balance is taxable in the year of forgiveness. For many borrowers who elect this forgiveness option the forgiven balance is relatively large so you will likely want to save some money each month into a savings or brokerage account to cover what is called the “tax bomb.”
If you have private student loans there unfortunately aren’t as many repayment options available to you. These loans will be repaid very similarly to the standard 10 year repayment plan for federal student loans. In some cases you are able to extend the repayment term to 15 or 20 years, however, this extended repayment term should only be considered if you truly can’t afford to repay under the 10 year term. This is because you will end up paying a considerable amount of interest over the extended period and you will also likely have a higher interest due to the increased risk the lender is taking on. You do have the option of refinancing these loans to receive a lower interest rate in some cases. It’s worth comparing interest rates on an annual basis to see if you could save money by refinancing. Federal student loans also allow for refinancing to a private lender, however there are federal benefits that need to be evaluated before doing so.
Please note that we are currently in a very difficult situation than normal, with the CARES Act and the temporary deferment of federal student loan payments. For more specific information around the CARES Act and what it means for you student loans please check out our CARES Act - What It Means For Your Student Loans blog post.