Repaying your student loan is your responsibility. At the end of your loan period, the holder of your loan will send you a notification, which is called a repayment schedule. Your repayment schedule indicates the total amount of money borrowed (principal), the interest rate of each loan, the monthly payment amount and the monthly payment due date. Repayment on your loans will normally begin 60 days to six months after you leave school depending on the type of loans you have borrowed. The exact amount of your monthly payments are determined by the amount you borrowed, the interest rate of each loan, any accrued or capitalized interest and the number of months you have to repay your loans.
The standard repayment option will automatically be your selected plan unless your servicer is otherwise notified. In the event that the standard repayment plan does not accommodate your needs, there are alternative repayment options available that must be applied for and approved by your servicer. A servicer must provide the choice of repayment plans no earlier than six months before the date of the first scheduled loan payment. Even if you do not choose a particular plan, the servicer and you may agree that all federal loans will be repaid under one repayment plan as long as the scheduled monthly payments cover at least the monthly interest charges. After the servicer makes the offer, you must respond with your choice within 45 days. Otherwise, you will be required to repay under the standard repayment plan. Although borrowers have alternate options, choosing an alternative repayment plan other than the standard will cost you more in the end due to additional accrued interest.
Since there is no interest penalty for early repayment of your student loans, you are encouraged to pay off your higher interest loans first, regardless of the repayment plan you choose. If you are able to pay an extra $100 a month, or pay a large lump sum once a year, it will decrease the interest you pay and reduce the time of your repayment period. If you are experiencing difficulty with your repayment, it is important that you contact your servicer immediately.
One sound debt management strategy is to ‘run the numbers’ before selecting a repayment plan. Ask your loan servicer to give you both the monthly as well as the total repayment amounts before selecting one of the options. Simply give them your portfolio of loans then ask them to compare both monthly payment amounts and total repayment dollars under the various repayment plans.
Some loan servicers, on behalf of the lender, offer what are referred to as ‘borrower benefits’ or ‘repayment incentives’, which amount to discounts if you pay your loans on time. Though not offered on all programs, borrower benefits or ‘rewards’ have become increasingly common in repayment programs. One reward program discounts your interest rate after 48 straight payments, while one reimburses borrowers for some of their loan fees after making 24 straight payments. Another program gives you an interest rate break if you pay from an automatic debit from your account, as opposed to paying by check. Be sure to ask your loan servicer if repayment incentives are available.
More than ever before, borrowers have a variety of options to help them with repayment. Knowing the various repayment options available for each loan program is part of a sound debt management strategy. The following section will introduce the repayment options currently available through various loan programs and will familiarize you with each option to ensure that you will know what questions to ask your loan servicer when choosing a repayment plan that best suits your needs.
Standard Repayment Plan - This is the standard schedule that will be assigned to you if you do not request otherwise. Under the standard repayment plan, your payments of principal and interest will be divided into equal monthly installments. Although the monthly payments will be higher, this plan will cost you the least amount over the repayment period. For federal loans, the repayment period is 10 years, for HEAL, the repayment period is 25 years. You may request a shorter term on HEAL if you wish.
Graduated Repayment Plan - Graduated schedules vary, but they all seek to give you payment relief when your income is lowest. This is accomplished by requiring interest only to be paid for an initial fixed period, followed by principal and interest payments over the remainder of the term. Under this plan, your payments are lower in the beginning when you are just starting your career and higher later in the term as your career advances and your income increases. When the payment amount levels off, it will be higher than it would have been under a standard schedule to make up for the amounts that were not paid early on.
Income Based Repayment Plan - This plan is a variation of the graduated schedule, and is not available on every educational loan. Payments are calculated as a percentage of your adjusted gross income and only increase as your income increases. Payments are generally capped at an amount slightly less than that required under a standard schedule. As with graduated repayment, lower initial payments are balanced by inflated payments later on.
Extended Repayment Plan - If you are looking for a lower required payment, but could afford to make extra payments occasionally, an extended schedule may work best for you. By extending the term from 10 to 25 or 30 years, you significantly decrease the required payment amount. Of course, you also significantly increase the total amount of interest paid over the life of the loan. You could combine the cost advantages of the standard schedule and the convenience of the extended schedule by signing up for an extended schedule with a low required payment, but making a payment equivalent to what you would have paid under a standard schedule (with the excess credited to the principal balance if that is permitted). You will pay the loan off in 10 years, but will also have the flexibility to make only the lower required payment if emergency expenses arise.
*Please note: All terms in bold/italic appear on our Glossary page.