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How Student Loans Work

Repaying Your Student Loans

college student
Figuring out the best way to repay your student loans is like trying to figure out a math problem you have no idea how to solve. Hill Street Studios/Getty Images

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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.

With private loans, you'll have three options for repayment: full deferral, immediate repayment or interest payments.

  • Full deferral allows you to put off making any payment on your loan until up to 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; once the loans have been dispersed, you have to begin repaying them. This method prevents an accrual of interest building up. There are also options to only pay the interest or some of the interest while in school.
  • Interest only payments require you to make payments while enrolled in school, but on only to cover the interest, which saves you from having a giant increase in your loan balance upon graduation. A partial Interest payment allows you to pay a smaller amount on some of your interest. Although your loan balance will still grow, it won't be as dramatic as if you had been in full deferral. Both of the options usually mean lower monthly payments than the immediate repayment and prevent interest from accruing so much.

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. Remember, unsubsidized federal loans will accrue interest while you are in school and during your grace period. The government offers a variety of terms for repayment of your student loans. 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. These can go up to 30 years when a loan consolidation has been performed. Graduated repayment is a 10-year method (or up to 30 when there has been a loan consolidation) where repayment begins with low monthly installments and gradually increases over time. This is meant to reflect the increase in salary professionals usually experience during their careers.

As of 2020, the department of education offers four types of repayment methods based on the income levels of the borrower. Income-driven repayment options include:

  • Revised Pay As You Earn (REPAYE)
  • Pay As You Earn (PAYE)
  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)

Each has a payment amount based on the borrower's "discretionary income," generally 10 to 20 percent of it.

With the four existing income-driven repayment plans, borrowers pay for 20 to 25 years and must update income information each year, which means payments fluctuate. During repayment, interest continues to accrue, which means your balance at year 25 could be greater than your balance at year one if your payments have been too low to even cover your interest.

All direct loans and direct PLUS loans made to graduate or professional students are eligible for the income-driven repayment plans. Direct PLUS loans made to parents are only eligible for the ICR and only if the loans have been consolidated. Older loans are generally eligible if they have been consolidated, but PLUS loans to parents might again cause an issue.

So what happens if you still have a balance after paying for 20 or 25 years? We'll talk about student loan forgiveness next.

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