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Once a student leaves or graduates from college the repayment clock starts ticking. Required repayment will begin six months after leaving college.

Updated October, 2019

Managing Student loans after Graduation

Six months after leaving college the repayment of student loans will begin.

The Department of Education will provide a detail on the loans outstanding and a repayment plan will need to be selected.  There are several repayment options and each has costs and benefits that allow the responsible individual to select what will work best. The Department of Education provides details on all repayment plans (the link to the site is provided below).

A key factor is understanding what is available to meet the repayment of the loans.  If there were payments made during college, there should be a good awareness of the interest cost on the loans and that payments will now include a portion of the principal that is outstanding.

This all works well if the graduated student has secured a job.  Ideally, the job search was started and completed during the last year of college.  The net benefits are obvious and are probably a good indicator that the college education had good effects.

Generally, a first job requires some adjustment to wardrobe, learning about commute expenses and adjusting to a new lifestyle. These all cost money. Make a monthly budget and plan accordingly. The key costs are the ability to pay rent and utilities, buy groceries and make the standard loan payment. If you can handle that you are in good shape.

If standard repayment is not going to work, then read through the various options (reduced payments in early years that adjust upward every 2 years, payments limited to a set portion of your income and loan terms that extend repayment from 10 years to 30 years).  Any plan other than standard repayment is going to cost more.

Take a look at this article on lendedu that provides a review of extended payment options.

PAYE vs. REPAYE: Which Student Loan Repayment Plan is Better?

The next step is to get to know your student loans intimately.  You want to know what amounts and interest rates are attached to each amount you have borrowed. You should have a list and you should rank them according to their interest cost each month.  Your goal, at this stage, is to save a little each month to start building a pile of cash that you can direct towards the most expensive loan on your list in an extra payment.  Plan that extra payment for 6 month intervals.  So, if you save $50.00 each month, at the end of 6 months you make an extra payment of $300.00 against that expensive loan.  It’s not going to have a big effect immediately but over time the net effect of this action will reduce your payments (the approach here is to establish savings discipline toward a goal).

Additionally, commit to devoting a portion of any bonuses directly to those higher rate student loans.  It is a bit painful but it is a bonus and not factored into a monthly budget.  So, the more of it that pays down these loans, the faster they are removed.  You can take this a step further and ask that grandparents, parents, uncles, aunts and cousins who want to give you meaningful gifts on your birthday and holidays do so principally in cash that is directed toward student loans. 

Here is a sample Loan Table for a graduated college student. Note that the loans are delineated by subsidized and unsubsidized. The interest rates reflect market and policy changes that took place while the student was in school.

The amounts vary because the financial needs changed from year to year and the student qualified for differing amounts.  Three of the Unsubsidized Stafford Loans carry they highest interest rate and those are the loans that would be the target for extra payments.  You can target one particular loan or spread your payment over all three. There is the added advantage of seeing them removed and knowing that you are actively addressing these loans in a way to improve your financial standing. It is the cost of the loan that is the target here.  While the Year 3 Subsidized Stafford loan generates a higher monthly cost in dollars (which is due to the size of the loan), those funds are cheaper than the Unsubsidized Stafford Loan.

These same principles can apply to any PLUS loans the parents might have secured during your college years to assist in costs.

A Final Warning

There are some students who do not repay their Student Loans.  The Government has instituted loan forgiveness that can occur at some point in the future (after 20 or 30 years of payments).  The amount that is forgiven is now a taxable item and the student will have to pay income taxes in the year the loan was forgiven on that amount.  So if you end up with $30,000 in student debt that is forgiven, you could owe almost $10,000 (assuming a 30% rate) to the IRS.  This amount is payable in the tax year that the amount is forgiven. The IRS does not readily forgive outstanding tax debts.

Tax Rates and Government policies change over time. It is impossible to predict what policy or rate will be in effect in 20 years.

Repayment Plans for Student Loans

PAYE vs. REPAYE: Which Student Loan Repayment Plan is Better?