In this topic, we cover:
- How federal loans are repaid?
- The repayment plan with the lowest total cost.
- Options for reducing your monthly payment.
College can be expensive, but it's a smart investment for the future. Higher education often pays for itself many times over in the form of higher wages and increased job opportunities.
Education debt is an example of "good" debt when handled correctly: borrowing only what you need from federally subsidized sources first, making sure other education loans are approved by your school, and minimizing high interest debt.
For most graduates, college debt definitely impacts life after college. In fact, most student loan repayment schedules last 10 years or more - that's 120 monthly payments.
What if you could reduce your payment amount significantly by simply making different choices? If you are just starting college, sticking to a monthly budget is one of the best ways to lower your overall debt. Please review our materials on "financial health" for more information on budgeting and saving money while in school.
If you are near graduation or have already graduated, you'll want to understand all of your repayment options. There are many repayment plans that are designed to fit your income, some of which reduce your monthly payment.
How Are Federal Loans Repaid?
Common methods for repayment include sending monthly checks to the servicer of your loan or setting up automated payments, so your payment is deducted from your bank account each month. Automated payments can reduce the chances of a missed payment. Missed payments can mean additional fees and higher interest rates. Some lenders and loan servicers offer a discount off of the interest rates if you set up automated payments from a bank account.
There are several different options for structuring the amount of your monthly payments on federal loans.
- Standard Repayment You pay a fixed amount throughout your repayment period, which is usually up to 10 years. If you can handle the monthly payments, which may start higher than other options but remain the same for the entire repayment period, the standard repayment plan may enable you to pay off your loan sooner than other repayment methods. This option may be less expensive than other repayment options overall, since you may end up paying less interest.
- Graduated Repayment This schedule begins with your paying a lower monthly payment amount than the Standard Schedule and then increases the amount on a periodic basis over the repayment period. This structure assumes your salary will gradually increase to help you handle higher payments in the future.
- Income-Sensitive Repayment Available to individuals who borrowed under the discontinued FFEL Program, your monthly payments are calculated a year at a time, based on your actual income, family size, and loan amount. After 25 years, any remaining amount of the loan will be forgiven, but you may have to pay taxes on that amount.
- Income-Based Repayment This repayment option may cap your monthly loan payments if you are having a hard time meeting basic living expenses. The government uses your income, family size and federal poverty guidelines to determine your eligibility.
- Extended Repayment If your loan balance (including the accrued interest) is over $30,000 at the time your loan(s) is scheduled for repayment, you may qualify for an extended repayment period of up to 25 years. While the monthly payments may be low, the total cost of the loan may be higher because of the interest charges.
Provided that you don't participate in a loan forgiveness program and repay your full loan amount, keep in mind that the Standard plan will be the least expensive overall. While the monthly payments may be lower for some repayment options, interest accrues over a longer period of time. Longer repayment schedules greatly increase the interest you pay. For example, repaying $30,001 in federal loans at 6.9% interest under the Standard plan costs a total of $41,615. Repaying the same loan under the Extended Graduated plan costs $68,242 - nearly $27,000 more expensive. To estimate your potential federal loan payment under a variety of plans, use the Federal Student Aid Repayment Estimator.
If you have private loans, your repayment schedule will likely be most similar to the standard one above, though you may have the ability to choose a repayment option: immediate repayment of principal and interest, interest-only payments while enrolled in school, or no payments until after graduation.
Student loans are often the first loans you will have. Repaying them responsibly will help you establish good credit, which can help you qualify for future loans on big ticket items such as a car, house or even graduate school.
Don't forget - if you can pay off your student loan early, you could save thousands of dollars in interest!
