Besides the total amount of your student loans, you’ll want to know what you can expect in terms of a repayment plan. This is one of the most important pieces of homework you should do when you decide to take out any educational loan. You might be tempted to push off thinking about repayment options – after all, they seem so far away in time – but the reality is, graduation day will arrive faster than you think, or you might be paying off some of the loan during school.
Whether you have federal or private loans – or a combination thereof – you can choose from several repayment options structured to make your life less stressful and repayment easier.
Student Loan Repayment Plans
First, remember that when you graduate, leave school, or drop below half-time enrollment, you'll have what’s called a “grace period” – the stretch of time you have before you are required to begin paying back your loan. It’s six months for a Federal or Direct Stafford Loan, nine months for a Federal Perkins Loan, immediately for a Federal PLUS Loan and 1-12 months for a private loan.
You'll likely receive final information about repayment during your exit counseling, given by your loan provider.
Federal Stafford Loans usually have the following categories of repayment: Standard, Extended, Graduated, Income Contingent and in some cases, Income Sensitive:
Borrower pays a fixed monthly amount for the loan term, up to ten years. The loan may be shorter than ten years, depending on the amount.
Similar to Standard Repayment, but allows a loan term of 12-30 years, depending on the amount borrowed. Reduces the size of the monthly payment, but increases the total repaid over the lifetime of the loan due to interest.
Starts off with lower payments, which gradually increase every two years. Like the Extended, the loan term is 12-30 years depending on the amount borrowed. Minimum payments must meet at least the accrued interest, and is usually at least $25.
Income Contingent Repayment
Based on the borrower’s income and total amount of the loan. The monthly payments are adjusted every year as the borrower's income changes, and the term can be up to 25 years. Any balance remaining after 25 years is discharged, but this balance is taxable, and this option is only available for Direct Loans.
Income Sensitive Repayment
Sometimes offered to lenders who pay a monthly amount based on a percentage of gross monthly income, with a term of 10 years.
Repayment choices do not apply to Federal Perkins Loans: a borrower typically has up to 10 years to repay, however. The monthly payment depends on the size of the debt and the length of the repayment period.
Generally, Direct Plus and FFEL Plus Loan borrowers can choose from any of the above repayment plans, with a few constraints, which can be explained by a loan representative.
Private loans generally do not offer as much flexibility on repayment plans, because they are in the business to make money and are not subsidized by government funds, as is the case with many Federal loans. Some private lenders will make options available that mimic the graduated payment programs offered by Federal loans, and some will offer a forbearance option but usually they do not allow students to extend their repayment terms.
However, private lenders do often offer consolidation loans, which can combine several private or private and Federal loans into one, making it easier to make one monthly payment with varying interest rates. And, private lenders have the ability to offer lower interest rates than Federal loans if a borrower’s credit is up to their standards.
Great care should be taken here, though, because this will often result in forfeiture of one stable interest rate set in any government loans, and might change or forfeit any forgiveness or deferment options given by the Federal loans or initial private loans. A consolidation loan will also require a credit check and approval.