Student Loans Repayment Options

Types of Student Loan Repayment Plans

Standard repayment plan

Standard repayment plans are the original plans offered by your lender. Under a standard plan, you pay a fixed amount each month for up to 10 years. Your actual payment amount and repayment period will depend on your loan balance. Contact your loan holder to find out the monthly amount you'll owe under a standard repayment plan. As a general guide, you'll owe approximately $125 monthly for every $10,000 borrowed, with the exact amount depending on your interest rate.

Tip: If your loan has a variable interest rate instead of a fixed interest rate, your payments may increase or decrease over the life of the loan.

Graduated repayment plan

Under a graduated plan, payments start out low in the early years of the loan but then increase in the later years of the loan. This plan is tailored to people with relatively low current incomes (e.g., young graduates just beginning their careers) who expect their incomes to increase in the future. Under a graduated plan, your initial payments may be as low as half what they would be under a standard plan. With some graduated repayment plans, the initial lower payment includes both principal and interest, while under other plans, the initial lower payment includes interest only.

Caution: With any graduated repayment plan, you'll pay more for your loan over time than you would under a standard plan. The reason is that interest charges are based on your unpaid balance each month, so the higher balance in the early years of your loan translates into higher interest charges. Also, if you extend your repayment option to keep your payments from becoming too high at the end of the loan, you'll wind up paying more interest over the life of the loan.

Example(s): Say you owe $10,000 at 8 percent interest. Under a standard plan, you would pay approximately $14,559, including interest. Under a graduated plan, if you choose a four-year, interest-only plan, your payments would be approximately $67 per month for four years and $175 per month for the remaining six years, for a total of approximately $15,816.

Extended repayment plan

Under an extended repayment plan, you extend the time you have to repay the loan, usually from 12 to 30 years, depending on the loan amount. Your fixed monthly payment is lower than it would be under the standard plan, but you'll pay more interest (often quite a bit more) because the repayment period is longer.

Example(s): Say you owe $10,000 at 8 percent interest. You extend your payments from 10 to 15 years and reduce your monthly payment to approximately $96 per month. The result is that your total cost for the loan will be approximately $17,203, compared with the $14,559 you would pay under a standard plan.

Tip: Many lenders allow you to combine an extended plan with a graduated plan. Though this will lower your payments even further, it will increase your overall costs for the loan.

Income sensitive plan

Under an income sensitive plan, your monthly loan payment is based on your annual income. If you are married, your joint income is used to calculate the required monthly payment. As your income increases or decreases, so do your payments. This choice is offered less often than the other repayment options.
Loan consolidation Loan consolidation is a bit different than the repayment plans described above. Here, you combine several student loans into one loan. This means you write one check each month. You need to apply for loan consolidation, and different lenders have different rules about what loans will qualify for consolidation. For example, the federal government will generally consolidate loans that are in default, while non-government lenders generally will not. With most loan consolidations, the repayment term is extended or the payments are graduated (i.e., start off low but increase in later years). As a result, your monthly payment is lower than before you consolidated. This will increase the amount of interest you pay over the life of the loan and thus the overall cost of the loan. Despite this cost, however, the trend is clearly in favor of consolidation as students graduate with more and more debt. In the past ten years, loan consolidations increased 400 percent.

Tips: (1) Most consolidation lenders require an outstanding balance of at least $7,500 on your loans before they will consider you an appropriate candidate. (2) It may also be possible to lower your interest rate by consolidating your loans, in which case the total cost of your loan will be lower.

Caution: If you have student loans that may be eligible for discharge in bankruptcy, loan consolidation will prevent you from discharging these loans because consolidating your loans is the equivalent of getting a brand new loan. Further, even though a married couple can consolidate their loans jointly, this is generally not a good idea. If you later divorce, you and your spouse are each responsible for the entire loan amount.

Accelerated payment

In contrast to having too little money, some lucky individuals may have plenty of money to apply to their student loans. If you stumble upon an unanticipated sum of cash, you may want to consider accelerated payment where you pay more than the monthly minimum on your loans. The excess payment can be applied to your principal balance. The result is total lower interest payments and a reduction in the overall cost of your loan.

Tip: There are usually no penalties associated with paying off your student loans early. If you have more than one student loan, you'll want to pay off those with the highest interest rates first.