When it comes time to repay student loans, many people feel overwhelmed or concerned about making monthly payments. Fortunately, most lenders offer at least two or three different repayment plans to fit different needs, whether you want to pay off your loan as quickly as possible or need to make smaller payments. The following list outlines the general policies of various repayment plans. Policies vary between institutions, so be sure to ask your lender about their specific plans.
- Immediate Repayment: This plan is frequently offered for private student loans. The repayment period begins shortly after funds are dispersed, usually about 30 – 60 days later. Payments under these programs are often fixed, meaning each individual payment will be the same amount. Because you begin making payments immediately, this plan accrues the least amount of interest, but it requires you to make payments during school.
- Interest-Only Repayment: With this plan, you begin paying off interest soon after the loan is dispersed. Your payments will cover the interest that collects each month, while repayment of the rest of the loan is deferred until after you leave school. Some lenders have options that allow students to make smaller payments on interest, usually around $25 per month. These types of plans are great for borrowers who are unable to afford full payments but want to get a head start on paying off loans.
- Deferred Repayment: This is the default repayment program for federal student loans, and some private lenders now provide this option as well. You make no payments while you’re in school, although interest will collect on your loans in most cases. After you have been out of school for six months, you begin making regular payments on your loan. For private loans, this is one of the more expensive repayment options because you will accumulate the most interest; however, with federal loans, this plan is often the least expensive due to its short repayment period and fixed payments.
- Graduated Repayment: If you don’t have much money after school but expect to earn a higher salary fairly soon, graduated payments might be your best option. Your payments will start out low and gradually increase over the life of your loan, usually every year or two. These plans can be little more expensive than standard fixed repayment plans, but they accumulate less interest than loans with longer repayment periods.
- Extended Repayment: For students who don’t meet financial hardship requirements, these plans usually offer the lowest monthly payments. Depending on your lender, you might be able to choose between fixed and graduated payments. Although your monthly cost will be lower, loans with extended repayment periods will accumulate more interest and cost more overall.
- Income-Considerate Repayment: Students who can demonstrate financial hardship might qualify for a repayment program that calculates payments based on their income. The U.S. Department of Education offers a few varieties of these plans. They review your income every year and adjust your payments accordingly. If you have not paid off the entire loan by the end of the repayment period, you could have the remainder forgiven. Most private lenders do not have these programs (or, at least, they do not openly promote them).
- Service-Based Repayment: Some lenders offer partial or total forgiveness if you meet certain employment requirements after leaving school. Most of these programs involve serving low-income communities in some capacity, such as teaching at-risk students, providing medical care in a struggling neighborhood, or entering a public service field. Additionally, some organizations like Peace Corps or Teach for America will repay your student loans if you agree to work with them.