Congratulations to the class of 2016!
Soon it'll be time to start repaying those student loans.
But at least some grads now entering the workforce are more likely to get help paying off their student loans from an unexpected source: their employer. More companies know that paying off student loans is a big concern of grads these days. So many are making student loan assistance a part of their benefits package for new hires.
Last year, PricewaterhouseCoopers, the financial services firm made news when it announced that starting this July, it will begin offering to pay $1,200 per year for up to six years toward the student loans of its newly hired employees. To make this perk a reality, PwC hired Gradifi, a Boston-based company that created a technology platform employers can use to make direct payments on their employees' student loans.
This newly emerging benefit offers some temporary relief from payments. As currently designed, the benefit stops after a set number of months (for PwC, it's 72 months) or when the loans are paid off. Also, under current tax regulations, the loan payments are included in the worker's taxable wages.
But if this benefit provides some relief from student loan payments, the hope is that it helps the new worker contribute to a 401(k) plan and receive additional matching contributions. That combination makes it a pretty good deal.
Regardless, if you have student loans, you'll need to know when you have to start making payments. For Stafford loans, it's six months after graduation. For Perkins loans, it's nine months. Graduate students with PLUS loans will have to begin making payments six months after they're no longer enrolled at least half-time. The first thing you should do is contact your lenders to make sure they have your current contact information.
When it comes to making payments, here are two questions to think through.
First, is it a good idea to consolidate your student loans? If you have multiple loans (most students do), consolidating allows you to combine most of your loans from various lenders into one fixed-rate loan, with one monthly payment.
But you'll want to check if this will lower the interest rate because the fixed rate for the consolidated loan is the weighted average of the variable rates on your existing loans, typically rounded up by the next eighth of a percentage point. Use the tools at the Federal Student Aid website to compare the numbers for your situation.
Second, how quickly do you want to repay your student loans? You generally have four options, ranging from 10 to 30 years. Of course, the quicker you pay off the debt, the less interest you'll pay. But it may be difficult to make large monthly payment on a low starting salary. And if tackling student debt keeps you from investing in your employer's 401(k) or paying off your credit cards, you should definitely consider an extended repayment period.
One payment option to consider is the Graduated Repayment Plan. This option starts off with a lower payment and then increases, usually every two years. Under this plan, you can pay back for 10 years and up to 30 years for consolidated loans. This is a good choice if you expect to receive regular increases in income and want to use that to pay off your loans more quickly.
A new option introduced last year is the Pay As You Earn Plan, or PAYE. Under this program, payments are capped at 10 percent of discretionary income (earnings that exceed 150 percent of the poverty wage level). Each year, payments are recalculated based on your updated income and family size. Any outstanding balance on your loan will be forgiven if you haven't repaid your loan in full after 20 years.
Also look into the Income-Based Repayment Plan, or IBR. Under this option, the loan payment can be as low as zero and is capped at 15 percent of discretionary income. If your total debt exceeds your annual income, you're likely to qualify. With this plan, after 25 years, any remaining loan balance is forgiven, but you may owe tax on the forgiven amount.