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How Student Loans Work


Repaying a Student Loan
Now that you're out in the real world it's time to repay those student loans. How long you have to do so depends on the repayment method you choose.
Now that you're out in the real world it's time to repay those student loans. How long you have to do so depends on the repayment method you choose.
©iStockphoto/shironosov

One of the decisions you'll have to make when you take out your student loan, whether it's federal or private, is how your repayment will be structured. You'll have several choices presented to you.

With private loans, you'll have three options for repayment: full deferral, immediate repayment or interest only. Full deferral allows you to put off making any payment on your loan until six months after you've graduated. Remember that interest will accrue throughout the time you're enrolled in classes, since private loans aren't subsidized in any way. The accrued interest will be added to the balance that you will begin to repay after you graduate. The good news is, depending on your income level, you can deduct up to $2,500 of that interest on your taxes each year.

Immediate repayment is pretty much what it sounds like; 45 days after enrolling, you will begin repaying your student loans. This method prevents an accrual of interest building up. Last is the interest only payment, where you make payments while enrolled in school, but on only on the interest. This usually means lower monthly payments and prevents interest from accruing.

Federal loans have a slightly different repayment structure. Like private loans, you will have the option of full deferral, throughout the time you're enrolled above half-time and usually for a full six months after you graduate. But the government offers much more attractive terms for repayment. Lengths of time given to repay run from 10 to 30 years.

Standard and extended repayment plans are similar, but cover a period of 10 and 25 years, respectively. Graduated repayment is a 10-year method where repayment begins with low monthly installments and gradually increases over time. This is meant to reflect the increase in salary professionals usually experience over their careers.

Three types of repayment methods are based on the income levels of the borrower. Income based repayment is a capped amount repayment schedule, and extends past 25 years. It's a new plan and after 25 years of repayment, the remaining balance may be forgiven in some cases. Income contingent plans are calculated each year based on the adjusted gross income of your household and doesn't exceed 20 percent of your monthly income. Income-sensitive plans span 10 years and are based on your annual income. They're calculated each year and increase in step with your yearly salary.

But what exactly happens if you simply find that you don't have the cash you thought you would after graduation? Read about defaulting on student loans on the next page.