Everyone can remember at least one test, or a series of exams/essays, that final week or two of undergraduate studies. This is the last hurdle for the vast majority of students as they embark on the phase after graduation from lifelong scholarship. As everyone was fretting about how much time they should dictate to study vs social obligations, the most looming and practical test of all lay hidden among the chaos.

So much time and effort was used up to satisfy the wishes of the academia personal tasked to decide if you did or did not live up to the mantra of the university you and they represent, the majority of us really forgot what it all cost.

Welcome to the exit counseling exam mandated by the federal government. Once you graduate, all borrowers enter a six month grace period, resulting in their loan payments become dormant. Correctly estimated by the federal government, all federal student loan borrowers have found a worthwhile career that strongly supports their financial situation and allows them to pay monthly student loans only six months after graduation….

The exit counseling exam borrowers have to go through after graduation describes the bleak reality of what your undergraduate experience really costs. After blindly accepting a loan that will constraint you for the better part of a decade(s) at the age of 18, you are now directed to choose a repayment plan that will help you/the loan provider pay/get your money back.  When the federal loan program started, borrowers didn’t have an option to choose other financial strategies to pay their loan(s) back. They had one choice, and the choice still exists today. The Standard repayment plan is a 10-year (120 month) strategy that gives the borrower a rigid monthly charge that must be paid to subtract their principal and interest charges. This is the default plan, but easily the most expensive.

Today, the federal government has made strides to improve the situation and mitigate the credit default problem. Here are two plans, and one public service acknowledgement, that every borrower needs to read into…

Income-Based Repayment Plan

Since 2009, the income-based repayment plan is the most common, multifaceted, repayment strategy borrowers have chosen. Re-calculated every year after filing your taxes, the income-based repayment plan calculates your monthly payment obligation per your submitted annual income. This percentage is based on a 25 year strategy, including complete loan forgiveness after 25 years. If your documented yearly income is under the 150% estimated poverty line, or around 18k for a one person household, your monthly accepted payments are 0$.

Pros –

If you do not have a job, or stuck in minimum wage, this plan is ideal for you. You do not accrue penalties for not paying anything for your loans because under this plan, you will owe 0$. This allows you to get on your feet and get by for the time being. In addition, this plan can be very helpful if you find a well-paying job quickly after filing your tax information in early February. If you are already in this plan, and you get a new job in March, you will not have to switch your 0$ monthly payment until you refile your taxes the following year.  This allows you to save a bit of money and make a large payment to your student loans once you start making monthly payments. Make sure to read how to make that payment and receive a fiscal bonus here.

Cons –

Well, for one thing, if you make more money annually than you collectively owe, you will no longer qualify for this program. However, that is probably not necessarily a bad thing right?? I mean, making 133$ monthly payments might seem awesome, but 10k more than that previous 35k salary sounds way better huh.

In addition, if you do stay in that 25 year-long repayment plan and get forgiven, that means you would have been paying monthly loans for 25 years – that is 300 months! To have that financial burden on you for that long can severely handicap your life decisions.

This plan is great to start off with; it gives you both the ability to “float” for a bit as you find a position financial situation and it also allows you to save money to put together a large first student loan payment. In the end, however, you will want to quickly change to a more suitable plan…

Pay as you Earn (PAYE)

Coming a little after the income-based repayment plan, the PAYE plan is applicable to a much larger group of borrowers. Starting at a little over 1% of your total student loan debt if you make an annual reported 20k, the monthly bill can get as high as 8.2% congruent on an annual 100k reported income. This percentage does decrease the more dependent household members you have, but it is still rather affordable. All loans are forgiven after 20 years. If you want this version of the plan, but an accelerated repayment period, check out the Revised Edition of the Pay as you Earn plan.

Pros –

Also having the ability to have 0$ payments if applicable, the PAYE allows the borrower to have calculated, reduced monthly payments for the (majority) of their student-debt years. With the ability to make 100k and still have favorable payments, the PAYE is more superior in this aspect than the IBR plan.

Cons –

Harder to qualify for. This is really the only negative; the federal government is really making strides on creating manageable debt for borrowers by evidence of this plan. However, it is harder to qualify for. A main piece of the application that is usually a deterrent for these applicants is credit score history. If the borrower has an undesired credit score history, it may hinder their ability to be on the PAYE. Read how to manage credit history here on my second shameless plug of this piece!

Winner: Both (but really PAYE)

Ideally, a borrower wants to start with the income-based repayment plan and then switch to the PAYE once they have a strong financial situation with a good credit history. Of course, if you already have a strong credit history, the PAYE is the true winner.

Lastly, a note for those who are working in a public service i.e. our real champions, the Public Service Loan Forgiveness Program is an ideal fit for you. Any “public service” orientated and non-profit job allows you to be placed on a 10 year loan-forgiveness program. Ten years (120 months) of consecutive payments qualifies you for complete loan forgiveness. Yes, 120 payments on the IRB plan will free you from the student loan burden. While 10 years is still arguably too long, this is still a great start. Follow the hyperlink to apply!

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