It is a question that passes through most students’ lips, or at least their minds, as they hurtle towards graduation: how do I repay my student loan? Much time is spent educating college-bound students on the concept of student loans, yet very little time is spent teaching them how to deal with this influx of cash. Borrowing money is made relatively easy for students, yet many will struggle to manage these finances, resulting in a veritable mountain of debt come graduation time. So, what can you do once you enter life as a graduate with this heavy burden of debt weighing you down? What are the options? This article will go into detail on student loan repayment, including the various options and the pitfalls that many will encounter along the way.
“It is a question that passes through most students lips, or at least their minds, as they hurtle towards graduation: how do I repay my student loan?”
What loan repayments options are there?
With most kinds of loan, there are a variety of different ways in which repayments are structured. Student loans are special, however, in that most students are unemployed while studying and immediately after graduating. Some private student loans will require payments while the student is still at school, whereas federal student loans are not quite that strict – bills for federal loans generally start arriving six months after the student has graduated. In both cases, there are a number of different options available. Yet, only one will be right for your post-graduate situation. Educating yourself on these options is an important process, both during and after college, and can save you a significant amount of money in the long run.
Here are the various student loan repayment options available:
- An income-based repayment plan seems to be the most popular choice these days. It is a plan that caps eligible students’ payments based on what they earn, making it easier for low-income earners to maintain their payments. The general figure for this cap is around 15% of the disposable income, meaning that this is the amount you will be asked to pay back.There are other benefits to an income-based repayment plan: public servants, for example, who make a certain amount of on-time payments with this plan can have any remaining balance forgiven. It is important to also note that with this plan, students must send the Department of Education proof of income each year.
- A standard 10-year repayment plan is in many ways the default plan to which a student will be automatically assigned. This is if they decide against an income-based scheme or some other plan. The main benefit of this plan is that, if you manage to keep to the repayment schedule, your debt will be paid off in a reasonable amount of time. The monthly average for a student on this plan who owes $25,000, for example, would be around $300.
- A graduated repayment plan is in many ways an alternative to the income-based scheme mentioned above in that it is designed to give recent post-graduates time to find employment. Payments begin at a low amount but will then rise by about $50 every couple of years so that the loan may be paid off within 10 years. It is perhaps the best option for those who enter employment at a low wage but are certain that their income will rise quickly as the years pass.
- An extended repayment plan is a way for students to lower their monthly payments as much as possible, consequently extending the life of their loan. Payments may be stretched from the standard 10 years to as many as 25 years depending on the student’s situation. Of course, this means that the student will end up paying a lot more in the long run.
- Options such as deferment and forbearance are designed for those that are unable to make payments for any amount, postponing or temporarily reducing the amount paid. Reasons for this may include disability or military service. Deferment is generally the better option because the loan interest in that case will be paid by the federal government. Forbearance should only be considered if you do not qualify for deferment, since it will accrue interest daily.
What else should I know?
Here are some other useful tips for repaying your student loan:
- It is important to ensure that the Department of Education is aware of where you are: if you move house, be sure to update your details.
- Determine how much you are able to pay each month and choose an applicable payment scheme. Of course, this can be difficult if you are yet to find employment.
- Late fees can be very costly, and may end up significantly increasing the total amount you pay on your loan – avoid them if possible.
- Setting up a direct-debit or auto-debit system is a good way to avoid becoming distracted and forgetting to pay.
- There is no penalty for paying down the loan ahead of time, so do not be afraid to take that opportunity if it arises.
- Keep good financial records: be organised and keep all your student loan documents in one place, both at college and after college.