Graduating is one of the best feelings in the world. It’s a happy time for everyone, and it symbolizes a fresh start and the ability to go wherever your dreams and hard work can take you.
The down side? Most graduates only have a six-month grace period before they enter repayment of their dreaded student loans. This can put a serious damper on those big dreams of financial independence, especially if your dreams involve doing important public service or nonprofit work for a small salary. Don’t worry too much – there are steps you can take now to successfully manage high student debt on a low-income!
1. Apply for the best student loan repayment plan. For many recent graduates, that means signing up for one of the four income-driven repayment plans that reduce your monthly payment by tying it to your income and family size. Each plan is different, but generally payments made under one of these plans are only a small percentage of your discretionary income. Depending on the numbers, some borrowers have no monthly payments at all. If that sounds too good to be true, it’s because there’s a catch: your interest will continue to balloon, and you’ll still owe taxes on the remaining balance after 20 or 25 years. Check out our recent article on taxable forgiveness to learn more, and use the handy Repayment Estimator to help choose the right plan.
2. Be aware of employers’ Loan Repayment Assistance Programs. Many employers have much-needed programs called Loan Repayment Assistance Programs (LRAPs), which help their employees pay back their student loans. LRAPs are usually structured as part of a benefits package. Some of these jobs design their LRAPs to help overcome the hurdle of lower public interest salaries. Other employers institute LRAPs to help attract more qualified staff. Either way, more and more companies are starting to take notice and offer assistance to borrowers. When applying for a postgraduate position, it’s always a good idea to ask potential employers if they have any LRAPs in place for employees.
3. Consider consolidating all of your student loans. Debt consolidation is completely free and easy to do. Instead of navigating a complex web of multiple payments and interest rates, a Direct Consolidation Loan will convert your multiple student loans into one – meaning you’ll only make one single monthly payment. If you have older loans, debt consolidation may also allow you to take advantage of newer programs like Public Service Loan Forgiveness (PSLF) and alternative repayment plans. However, if you have any borrower benefits on your older loans (like Perkins Loan Forgiveness, for instance) you’ll lose it once you consolidate. Think wisely about whether this is the right option for you!
4. Take advantage of Public Service Loan Forgiveness (PSLF). A huge misconception about PSLF is that it’s a program you enroll in once graduating. The truth: you won’t apply for PSLF until after you’ve made at least 120 qualifying payments on your Federal Direct loans while working in a qualifying public service position. You’ll also make sure to certify your employment along the way. Sound confusing? Now is the perfect time to become knowledgeable about PSLF and what it takes to be eligible for 10-year forgiveness!
5. Budget, budget, budget. It may take some drastic budgeting, but it is possible to pay back your student loans and survive on a public service employee salary. As a recent graduate, it’s completely okay to move to a cheaper apartment, get a side job, or skip restaurants in favor of eating at home sometimes. You can also give up cable and use Netflix, Hulu, and HBOGo to watch your favorite shows – whatever works best for you!