Two Minute Money: How do I start paying my student loans?

Turner Cowles
Turner Cowles

Americans owe more than $1.4 trillion in student loan debt, and the average debt for a 2016 grad is $37,000. That’s a lot of money, so if you’re among those feeling the pinch, you might be wondering how you even begin to start paying it back.

The good news is that federal loans make up 92% of all student loans. That’s good news because Uncle Sam tends to charge less interest, and he offers you several ways to pay him back.

Standard repayment plan

The traditional method, called the standard repayment plan, is equal monthly payments over the life of the loan. You’ll end up paying the least amount of interest with this plan because of how quickly it gets paid off. But if you owe a lot, you might not be able to swing those huge monthly payments.

If you have more than one federal loan, you could consolidate them to increase the life of the loan to as long as 30 years. Your monthly payments will become more affordable, but you will end up paying more overall.

After graduation, you typically have a six month grace period — called deferment — before you have to start making repayments.

Graduated repayment plan

If you’re worried about high monthly payments right out of school, you can opt for a graduated payment plan. Instead of paying the same monthly payment over the life of the loan, you’ll start by making smaller payments, which will increase gradually — usually every two years.

Income-based plans

If neither the standard nor graduated repayment plan works for you, you still have options, including several based on how much you earn. All of these plans have very similar names that can get very confusing.

These plans are recalculated every year from your tax return. You’ll submit your return to your loan servicer, which will then calculate what you owe based on your discretionary income, which is the money leftover after you pay necessary bills like rent, utilities and food.

The two PAYE (Pay As You Earn and Revised Pay As You Earn) programs will charge you no more than 10% of your discretionary income.

Income-based and income-contingent repayment plans charge a bit more, up to 20% of your discretionary income. An income-contingent plan charges 20% of your discretionary income or the amount you would pay on a payment plan with a fixed payment over 12 years, adjusted according to how much you earn, according to the Department of Education.

Most income-based plans (any plan that calculates what you owe based on how much you earn) will not factor in your spouse’s income when determining your discretionary income. Only the Revised Pay As You Earn plan will.

In some cases your debt could be forgiven — like if you work as a public servant for at least 10 years and never miss a payment.

Falling behind on payments leads to delinquency on your loans. Your credit will drop and down the line it’ll be harder to get a car loan or a mortgage, so make sure you understand what payment plans you’re eligible for.

If you’re still confused, reach out to your state’s office of financial aid.