When you leave school, you won’t have to begin repaying your federal student loan right away. That doesn’t mean you shouldn’t do just that.
Stafford Loans come with a six month grace period that starts when you leave school or drop below half-time enrollment. During that six-month window, you won’t be required to make payments on your federal student loans.
But consider this: if you apply for income-based repayment, your student loan payment is set at 15% of your discretionary income (the difference between your adjusted gross income and 150 percent of the poverty guideline amount for your state of residence and family size, divided by 12). Under Pay-As-You-Earn, your payment is 10% of your discretionary income.
Disposable income is determined by your income for the previous calendar year – a year in which you likely weren’t making very much money. And if you made very little money, your federal student loan payment may be as little as $0 per month.
That amount resets each year when you do your taxes, so you’d likely have that low payment until February of next year.
Still, you may be wondering why you shouldn’t simply ride out the grace period or take some forbearance time to give yourself a little breathing room.
The reason why that’s a bad idea is that you qualify for IBR or PAYE only if you’re experiencing a financial hardship that doesn’t allow you to repay your federal student loans on your current salary. Once you’re in the program you no longer need to qualify, and can’t be kicked out of it so long as you make your regular payments.
If you wait until you’re making a decent salary then you may not qualify for IBR or PAYE at all.
Once in repayment under IBR or PAYE, the clock begins to tick on the discharge of your student loan balance. If you’re in IBR, the unpaid balance of your student loans is discharged after 25 years; if you qualify for PAYE, the balance disappears after 20 years. It makes sense to start that clock ticking now rather than waiting for six months or more.
In order to take advantage of this tactic, you need to request a shorter grace period by contacting your loan servicer. Once that’s done, you can be on your way to repayment … and to ultimately wiping out a bigger chunk of your federal student loan.
By the way, this applies to federal student loans only. There is no IBR or PAYE for private student loans.