it’s time to start repaying your college loan. are you ready?

Budgeting tips, strategies, and government programs to make it easier

Colleges and universities might not offer programs on repaying student loans as standard practice, but they might want to consider one.

The federal college loan repayment pause, first implemented in March 2020, has expired, and payments came due in October. If you are among the 28 million borrowers facing that deadline now that the relief program has ended, we’ve got some helpful guidelines.

There are several repayment paths to consider, after all. Borrowers even have the option of holding off payments for an additional 12 months without defaulting.^{1, 2}

That “on-ramp” option can come with potential drawbacks, however. So before choosing your repayment path, it would pay to perform an honest analysis of your financial standing today, and what you plan in the coming year.

Tips for budgeting with college loans

If you’ve managed your money based on a personal budget and now owe college debt, that budget is going to change. If you didn’t have a budget, then it might be time to make one.

Start by summing up your monthly necessities – utilities, debts, and food – and deducting the total from your total after-tax income. The balance is for discretionary items, savings, and your college loan payments.

If you’re unsure how much money should go into each pot, a good rule of thumb is the 50/30/20 rule. With it, you allocate 50% of your income for needs, 30% for non-essentials, and 20% for savings. Ideally your college loan debt could fit in the “needs” category.

If the added payment expands the “needs” pool well beyond 50%, and eats up too much of your discretionary and savings budgets, you can consider other repayment approaches.

Calculating the right repayment strategy for you

First off, the government provides several options for repaying your federal college loan once it comes due. You can even estimate payment sums under various plans using the Federal Student Aid office’s loan simulator.

If you do not choose a specific government plan, you will be automatically enrolled in the Standard Repayment Plan. This plan generally requires fixed payments of at least $50 a month for up to 10 years.

Should that monthly amount threaten to put you behind on other bills, particularly high-interest ones, you could consider consolidating your debts under a low-interest loan. With our f1RST® Quick Loan, for example, you can draw money at a promotional rate of 8.99% for the first six months. Or, if you have financial collateral such as an investment account, you might qualify for a lower-interest secured loan. You can compare details here.

Another possibility is the 12-month on-ramp period we mentioned earlier in this article. This option pauses payments through Sept. 30, 2024, and is automatic; simply don’t pay and it will take effect. Your loan will not fall into default.³

But take note: Interest will continue to accumulate during the on-ramp period, adding more to the amount you will owe. The on-ramp also does not provide progress toward potential loan forgiveness.^{4, 5}

Government programs that offer help and forgiveness

If you do want to start repaying your loan right away, but can’t afford paying through the Standard Repayment Plan, then consider an income-driven repayment (IDR) plan. These government programs determine monthly loan repayment amounts based on your income and family size.⁶

They also provide loan forgiveness if the debt isn’t repaid by the end of each plan’s repayment period (20 to 25 years).⁷ There are four options.

Saving on a Valuable Education(SAVE) plan – Introduced in August, SAVE is the new name for the Revised Pay as You Earn (REPAYE) plan. It sets the borrowers’ monthly payments at 5% to 10% of discretionary income. If you had been enrolled in REPAYE, then you’re automatically registered in SAVE. The repayment period is 20 years (for undergraduates) or 25 years (post-graduate loans).⁸

Pay as You Earn (PAYE) Repayment plan – Under this plan, your monthly payment would generally be 10% of discretionary income, but never more than the amount of the 10-year Standard Repayment Plan. The repayment period is 20 years.⁹

Income-based Repayment (IBR) plan – This program sets payments to 10% of your discretionary income if you’re a new borrower as of July 1, 2014.For borrowers before then, the payments are 15%. In either cases, payments are never more than those of the 10-year Standard Repayment Plan. The repayment period is 20 years borrowers after July 1, 2014, and 25 years for others.^{10, 11}

Income-contingent Repayment (ICR) plan – Here, the monthly payments would be the lesser of either 20% of your discretionary income, or what you’d pay on a fixed-payment plan over 12 years (income adjusted). The repayment period is 25 years.¹²

*SAVE-ty tip: If you’re enrolled in the SAVE program, ensure your monthly statement amount is correct. In mid-October, more than 400,000 borrowers received miscalculated monthly payments, some higher than what they owed, due to a glitch while transferring the loans from REPAYE.¹³

Ready to graduate to a debt-free life?

No matter what your degree or GPA, you have the right to options on federal college loan repayment. And regardless of your choice, you can still consolidate your other debts into a lower-interest loan if it gives you peace of mind. Your banker can help.

Know your options, and feel like a smart cookie.

If you’d like to learn more about building a budget, read our column on doing so here.