With so many borrowing options available, choosing the right student loan for your needs requires a fair amount of research and consideration. Your decision-making doesn’t end there, however. Whether you opt for a federal or private student loan, you’ll also need to choose from a number of possible repayment plans.
Your goal should be to pay off your student loans in full and in a timely, responsible manner. Of course, everybody’s needs are different and there is no one-size-fits-all approach to student loan repayment. By understanding the most common repayment options, you can ultimately decide on the best strategy to meet your needs.
What to Consider When Choosing a Repayment Option
Before you start exploring repayment options through your lender, there are a few factors you should be thinking about.
Be realistic about your chances of securing employment in your field, as well as your starting salary. While there’s no guarantee that you’ll find a job in your field right away or that you’ll make a specific starting salary, a little research can go a long way. The United States Department of Labor’s “Occupational Outlook Handbook” is a great resource for learning more about hiring trends, industry growth, median salaries, and other information about your potential field of employment.
If you’re in a high-demand field with decent pay, you may feel more confident about being able to repay your loans comfortably. On the other hand, if you’re in a notoriously low-paying and/or saturated field, you may have a harder time jumping into your loan repayments immediately after graduating—or you may need to get a little creative with your budgeting.
The interest rate you’ve secured on your loan should also play a role in the repayment plan you choose. The higher your interest rate, the more you’ll end up paying on your loan over time. If any of your loans are high interest, these are the ones you’ll want to prioritize paying off first. On student loans with lower interest rates, stretching out your repayment terms won’t cost as much in the long run.
Is graduate school a possibility in your future? If so, this could also affect your plans for repaying your student loans. Not only will you probably need to borrow more, but your lender may also offer the option to defer your loan payments as long as you’re in school. If this is the case, find out whether your loans will continue to accrue interest during the deferment period. Most likely they will, so you’ll want to at least pay off that interest throughout your time in graduate school.
Federal Student Loan Repayment Options
If you’re taking out Federal student loans, there are a few common repayment options to be aware of.
Standard Repayment Plan
The most common repayment plan for federal loans is the standard repayment, which gives you 10 years to pay off your loan balance in fixed monthly payments. This repayment plan is available to all federal student loan borrowers.
Graduated Repayment Plan
With a graduated repayment plan, your loan payments start off lower and then steadily increase in small increments every two years. The total repayment term for this plan is still 10 years, and it is available to all borrowers, regardless of federal loan type.
Extended Repayment Plan
nother option for Federal borrowers is the extended repayment plan, which offers fixed or graduated payments over a total repayment term of 25 years. This option is available to all federal subsidized/unsubsidized borrowers, Stafford loan borrowers, and PLUS borrowers.
Income-Based Repayment Plan
On an income-based repayment plan, your monthly loan payments are calculated based on your income; payments will be between 10% and 15% of your discretionary income and will never exceed your calculated payment on the standard repayment plan. This option is ideal for Federal borrowers with a high debt-to-income ratio.
Common Private Student Loan Repayment Options
While private loan repayment options tend to be more limited and can vary greatly from lender to lender, there are a few factors to consider.
Immediate Repayment Plans
Some private lenders require you to begin paying off your loan balance while you’re still in school, so there’s no deferment or forbearance option available. This can be difficult for those on a limited income while in school but can help you avoid carrying student loan debt for decades to come. It can also help you build up your credit score, which will enable you to get other loans such as credit cards and auto loans in the future.
Interest-Only Repayment Plans
Other private lenders may allow you to make payments on your loan interest or make a nominal payment such as $25 per month while you’re in school. This can be a more affordable option than an immediate repayment plan and helps you avoid having your student loan interest capitalized. For students with limited budgets, some private lenders even allow for partial-interest payments.
Deferred Payment Plans
A deferred payment plan means that you won’t be required to make any payments on your student loans until after you graduate, though the specific timeframe can vary from one lender to the next. Deferred payment plans save you money while you’re in school, but it’s important to understand that your interest is still accumulating even during this deferment period.
Tips and Tricks for Repaying Your Student Loans
No matter which type of loan or repayment option you end up choosing, there are a few tips worth following that could help you pay down your student loans faster or save you money on your loan payments.
Explore Special Discount Opportunities
Some lenders offer special discounts, such as a small interest-rate discount for setting up automatic payments through your bank/checking account. Find out which discounts are available with your lender and take advantage of the ones for which you’re eligible.
Inquire About Repayment Assistance Through Your Employer
Some employers (and even some Federal programs) offer student loan repayment assistance or student loan forgiveness. As you begin applying for jobs after graduation, look specifically for employers that offer repayment assistance as a benefit. If you’re in a field such as education/teaching, check out forgiveness opportunities that may apply to some or all of your loans.
Make Slightly More Than the Minimum Payment
Whenever possible, try to pay more than your minimum student loan payment. Just make sure that if you have a private loan, there are no prepayment penalties in-place. Otherwise, paying off even a little extra on your loan balance from time to time can save you money over the life of your loan. You’ll also pay off your loans sooner this way.
Look Into Refinancing Options
Last but not least, be prepared to explore refinancing options if and when the time comes. Refinancing allows you to essentially replace your existing student loan(s) with a new loan that has more favorable terms, such as a lower interest rate. Often times, refinancing will make sense for those who took out high-interest loans to pay for school.
Above all else, remember that having student loan debt doesn’t mean that you must postpone achieving your long-term goals, such as buying a house. You can still lead a happy and fulfilled life as you pay off your student loans, especially if you choose your repayment plan carefully. Ultimately, student loans (and their many available repayment plans) give you the opportunity to finance your dreams now by attending a college or university of your choice.