Crafting A Repayment Plan for Your Student Loans

October 21, 2011 | posted by Jeff Sheely.

It’s a time of great change for the members of the recently-graduated Class of 2011. Whether a few months into a new job or still looking for the right opportunity, everyone is trying to figure out their new life – and just as importantly, how to pay for it.

The first step towards gaining your footing financially is to take stock of your income and expenses and create a budget. Of course you’ll want to start by making sure you can pay for the necessities – food and shelter – but there are a lot of other expenses for which you’ll need to plan. A professional wardrobe. Your car note. TV and Internet. It all adds up quickly. And then there’s the other big milestone you’ll soon face: starting repayment on your student loans.

On most student loans, the grace period – the time after graduation before you’re required to begin repayment – is six months. Once it expires, the  (often large) addition to your monthly expenses can seem crippling, but don’t worry! With careful budgeting and open communication with your lenders, you can come up with a plan to pay them back without defaulting or otherwise hurting your credit.

Planning for Student Loan Repayment

As we’ve said above, the first key to successfully repaying your loans is to put together a personal budget. You’ll need to know how much money you are spending on the essentials and then determine what you can afford to put towards your loans. Ideally, you’ll be able to budget enough money to cover your monthly payments and you can simply begin repayment. But what happens if you can’t afford to do that yet?

In the event of not being able to afford your payments, you have a few options, but the key to all of them is open communication with your lenders. As soon as you realize that you may have trouble making your scheduled payments, your first step should be to call your lenders and discuss your options.

You should explain your entire financial situation (with documentation if possible) and work with your lenders to come up with a plan for repaying your loans. It’s in both parties’ best interest to come up with a suitable plan, so your lender will likely want to work together. Here are some options that you can discuss:

  • The government offers Income Based Repayment (IBR) plans on Federal loans. These plans cap your monthly payment at a given percentage based on your annual income and family size. The amount you pay is adjusted yearly to reflect changes in your financial situation. Not all private lenders offer IBR, but you may be able to negotiate it in some circumstances.
  • Most lenders – including the Federal government – offer deferment or forbearance for borrowers with extenuating circumstances. These options allow you to suspend payments on your loan until you are able to gain your financial footing. While interest does not necessarily accumulate during a deferment, it will continue to grow during a forbearance, so make sure that you discuss the details with your lender.
  • Consolidating your loans can also be an option for making your payments more manageable, especially if you can get a favorable interest rate. But remember to consolidate your Federal and private loans separately, as Federal loans have extra protections that you’d lose if you combine them with your private loans. To learn more about the potential benefits of consolidation, read our Ask the Experts post on whether or not to consolidate your loans.

While paying back your student loans may seem daunting at first, always remember that you have options. Budget carefully and make sure to communicate regularly with your lender, and you should be able to pay them back while keeping your good credit intact. If you have any other questions, feel free to use our Ask the Experts form and we will do our best to help you out. Good luck!

Image: David Castillo Dominici