A college or graduate degree can be valuable and empowering. It can also come at a significant cost, mostly in the form of student loans. If you or someone you know is faced with the challenge of repaying student loans, it’s important to brush up on some student loan basics.
Remember the grace period.
Thanks to the grace period built into most student loans, you’ll likely have six to nine months after graduation before you need to start repaying them. This gives you some breathing room to get financially settled before you start paying off that debt. However, not all lenders offer this grace period. And for some loans, interest may accrue during your grace period. So be sure to understand the terms of your loan.
Understand your repayment options.
With federal student loans, you can choose or be assigned a repayment plan once you start making your payments. You can also change your repayment plan at any time for free. Private loans, however, may have different terms — so again, be sure to understand what you’re signing up for when you initially take out a loan from a private lender.
- Standard repayment plan: Under a standard repayment plan, you generally pay a fixed amount each month for up to 10 years.
- Graduated repayment plan: This type of plan is geared toward those with relatively low current incomes who expect their earnings to rise in the future. Here, your payments start out low in the early years of the loan and increase in later years. As with the standard repayment plan, the term is generally 10 years. However with this type of repayment plan, you’ll ultimately pay more for your loan than a standard plan. This is because more interest accumulates in the early years when your outstanding loan balance is higher.
- Extended repayment plan: These plans let you extend the time you have to repay your loan from 12 to 30 years, depending on the loan amount. Your fixed monthly payment is lower than it would be under a standard plan, but you’ll pay more in the long run because more interest accumulates under the longer repayment period. Many lenders also allow combinations of extended and graduated plans.
- Income-based repayment plan: With these plans, monthly loan payments are based on your annual discretionary income. Note that these plans apply to federal loans, but not necessarily private loans. The federal government offers PAYE (Pay As You Earn) and REPAYE (Revised Pay As You Earn) plans, allowing qualified borrowers to pay 10% of their discretionary income toward their student loans each month. After 20-25 years of on-time payments, the remaining balance may be forgiven. Direct subsidized and unsubsidized federal undergraduate loans are eligible for these programs, as are graduate PLUS loans. For more information, visit the federal government’s student aid website at studentaid.ed.gov.
- Loan consolidation: While technically not a repayment option, loan consolidation allows you to combine several student loans into one, sometimes at a lower interest rate. You’ll write one check each month, but keep in mind that lenders have different rules about which loans qualify for consolidation. With most loan consolidations, you can choose an extended repayment and/or a graduated repayment plan in addition to a standard repayment plan.
- Refinance: If you have private student loans, you may be able to refinance them at a lower rate. It could be worthwhile to contact companies that provide this service to see if you’re eligible and whether refinancing makes sense for your personal situation. Note, however, that this option isn’t available for federal student loans.
Determine what you can pay.
To pick the best repayment option, create a budget and figure out the amount of discretionary income you have to put toward your student loan each month. Then review your options to see what you can afford, and how much interest you’ll pay over time.
You should also ask whether your lender offers special discounts for prompt repayment. Some may shave a percentage off your interest rate just for allowing direct payments from your checking account. Some may even waive a few monthly payments if you pay on time for a certain period.
Don’t forget the details.
You may also be able to deduct some or all of your student loan interest on your federal tax return. In 2017, if you’re a single filer with a modified adjusted gross income (MAGI) under $65,000 or a joint filer with a MAGI under $135,000, you can deduct up to $2,500 of student loan interest that you pay during the year. A partial deduction is available to single filers with a MAGI between $65,000 and $80,000 and joint filers with a MAGI between $135,000 and $165,000.
There are a couple of points to keep in mind, however: You must have taken out the loans when you were at least a half-time student, and you can’t take the deduction if someone else has claimed you as a dependent on their tax return.
If you paid $600 or more of interest to a single lender on a qualified student loan during the year, they should provide you with Form 1098-E at tax time. This form shows the amount of student loan interest you’ve paid for the year. For more information, see IRS Publication 970.
In addition, it’s important to keep accurate, accessible records of your loan repayment documents. Hold onto and organize copies of promissory notes, coupon booklets, lender correspondence, deferment and/or forbearance paperwork, and notes of any phone calls.
If you can’t pay …
At times, you may find it financially difficult or impossible to repay your student loan. If this happens, don’t stick your head in the sand and ignore your payments — or your lender. Contact your lender as soon as possible and apply for a deferment, forbearance, or loan cancellation.
- Deferment. With a deferment, your lender grants a temporary break from repaying your loan. It usually lasts six months and is based on a specific condition, like unemployment, temporary disability, military service, or a return to graduate school full-time. For federal loans, the government pays the accrued interest during the deferment period, so your balance won’t increase.
- Forbearance. In this situation, your lender allows you to reduce or stop your loan payments for a certain period of time, generally six months. Interest, however, continues to accrue, even on federal loans.
- Cancellation. Cancellations permanently wipe out your financial obligations. Situations allowing cancellations include your death or permanent total disability, or if you take a job teaching needy populations in certain geographic areas.
To qualify for any of these options, you’ll need to complete an application from your lender, attach supporting documentation, and follow up to make sure it’s been processed correctly.
Don’t let mismanaging your student loans get in the way of making the most out of your degree. It’s important to understand the repayment process and your options, stay organized, and seek extra help if you need it. After all, your degree should be an asset, not a liability that becomes more costly than it needs to be.