How Paying Off Student Loans Works

Paying off Different Types of Loans

There are many different types of loans available when you're planning how to pay for college. Believe it or not, the way you pay them back may depend on what type of loan you have.

Whether you're the student or the parent, you may have taken out a home equity loan or home equity line of credit (HELOC) to cover college expenses. During repayment, most home equity loans work like mortgages. Your key concerns should be whether you can make your payments on time, stay ahead of the market value on your property and prevent foreclosure. If you have a HELOC, the mortgage lender may have other options when the borrowing period ends, such as moving the debt to a traditional loan.

You might have unsecured loans instead of, or in addition to, equity loans. If you have a private student loan, check your loan paperwork for limits, interest rates and repayment terms. If you have a federal student loan, your interest rates and repayment terms depend on the type of loan, the date the loan was made and your selected repayment plan.

Federal Perkins Loans give you up to 10 years to pay, and you'll owe your school directly for that amount. Also with the Perkins, you don't have to pay while you're enrolled at least half-time, and you'll have a nine-month grace period before repayment when your enrollment ends.

Federal Stafford Loans and Parent Loans to Undergraduate Students (PLUS) are paid back to whomever you borrowed from. You owe the federal government directly if you borrowed using its Direct Loan Program. You owe the bank or lending institution managing your loan if you borrowed using the Federal Family Education Loan (FFEL) Program. Repayment for PLUS loans starts after only 60 days, but you don't have to pay your Stafford Loans while you're enrolled at least half-time. Stafford Loan repayment starts after a six-month grace period when your enrollment ends.

You can choose one of the following repayment plans for your federal student loans:

  • Standard Repayment is a fixed amount each month, with payments of at least $50 and up to 10 years to repay the loan in full.
  • Extended Repayment is a fixed or graduated monthly payment with up to 25 years to repay the loan in full. To qualify for this repayment option, you must owe more than $30,000 in loans under the same program (Direct Loan or Federal Family Education Loan).
  • Graduated Repayment lets you start out with a lower monthly payment, and increase that payment amount every two years. You'll have up to 10 years to repay the loan in full.
  • Income Based Repayment (IBR) sets the required monthly payment to a maximum based on your income and family size. You'll have up to 25 years to pay the loan, and the possibility of canceling the remaining balance of the loan after that time if you meet certain requirements.

If you plan to pay off your loan early, make sure you won't be punished by the lender. In many cases, you can pay off the loan early to avoid interest that would otherwise accrue each month. Some loans, though, might require you to pay all or part of that interest, or some other repayment fee.