When it comes to repaying your school loans, you’ll likely have some repayment options to consider, depending on the source of the loan and how much you owe.
If you are paying back a Stafford Loan, you will begin paying back the loan within six months of you graduating, leaving school or dropping below half-time enrollment.PLUS loans begin repayment within 60 days after the loan is fully disbursed.
However, a Parent PLUS Loan borrower whose loans were first disbursed on or after July 1, 2008, may choose to have repayment deferred while the student for whom the parent borrowed is enrolled at least half-time and for an additional six months after that student is no longer enrolled at least half-time. A graduate student PLUS Loan borrower can also defer repayment while the borrower is enrolled at least half-time for an additional six months after the borrower is no longer enrolled at least half-time. Interest that accrues during these periods will be capitalized if not paid by the borrower during the deferment.
The repayment periods for Stafford and PLUS Loans can be anywhere from 10 to 25 years, depending on how much you owe and the repayment plan you choose. The federal government offers several repayment plans, including (for a complete list of repayment options, go here) :
Standard Plan: You have a fixed annual repayment amount paid over a fixed period of time, which can’t exceed 10 years. You’ll pay less interest with this plan than with others.
Graduated Plan: This plan offers lower payments at the start, then your payments will gradually increase over time as you have more earning power, usually every two years.
Income-Contingent Repayment (ICR) Plan: This plan, which applies to Direct Loans, bases your monthly payments on your annual income (and that of your spouse, if you are married), your family size and the total amount of your Direct Loans. You will have 25 years to repay under this plan, then the unpaid portion will be forgiven. However, you might have to pay income tax on the amount that is forgiven.
As of July 1, 2009, graduate and professional student PLUS borrowers in the Direct Loan program are eligible to use this plan, but Direct Loan parent PLUS borrowers are not eligible.
Extended Payment Plan: This plan will extend your repayment period up to 25 years if your loans total more than $30,000.
Income-Based Repayment Plan (IBR): Under this plan, the amount of your monthly payment will be based on your income during any period when you have a partial financial hardship. The repayment period under this plan may exceed 10 years.
If you choose to repay under this plan and meet certain other requirements over a period of time, you might qualify for cancellation of any outstanding balance on your loan.
So, let’s say you choose to repay your loan using the Standard Plan, and you decide that 8% of your income will go toward paying off your loan. The chart on the right gives you an example of what your payments, and your total amount paid, might look like.
Perkins Loans - You’ll have nine months after graduating, leaving school or dropping below half-time status to begin paying back a Perkins Loan. Even though a Perkins loan is a federal loan, you will actually be repaying the loan through your college or university and your school, or its lender, will provide you with specific payment options.
Deferred Payment Plan - Under certain circumstances, you may be eligible for a deferred payment plan. This allows you to defer principal and interest payments until graduation. Keep in mind, though, that deferring payments will probably increase your long-term loan costs.
Consolidation - You might also consider consolidating your student loans. Consolidation is a way of simplifying your loan repayment by combining all of your federal student loans into a single fixed-rate loan. Extending your repayment term may help reduce your monthly payment, but the amount of interest you pay over the life of your loan will increase. In addition, you may risk losing the deferment and forbearance rights of your current federal loans.
Default - There are always consequences if you fail to uphold your end of any agreement. In the case of your federal loans, there are consequences you should be aware of if your federal loan goes into default, which means you failed to pay back your loan according to the terms you agreed upon.
- The national credit bureaus might be notified of the default, which means it will negatively affect your permanent credit history. You could be ineligible for any future federal aid, should you decide to go back to school.
- Your loan payments might be deducted from your paycheck.
- Your state and federal income tax refunds might be withheld and applied toward the amount of money you owe.
- Your loan could be assigned to a collection agency.
Private Loans - If you have taken out a private loan to pay for your education, your repayment plan will depend on the lender and the amount you owe. Make sure you understand what repayment options are available to you when deciding upon a private student loan.
TIP: School loans are a great resource if you need them to pay for your college education. However, you should be sure that you have researched all the other options for paying for school including: grants, scholarships and work study programs.
Any school loans you take out should be one part of a more comprehensive college funding plan. To get started on building your own college funding plan, check out the College Funding Online tool. You’ll get a complete overview of the college funding process, including ALL the funding options available to you. And you’ll be able to use the College FundPath™ process and worksheet to build your own college financing strategy.