How to Manage a Student Loan

School's out for more than the summer and now you have to begin paying back those loans. What's your plan of attack?
School's out for more than the summer and now you have to begin paying back those loans. What's your plan of attack?

There is no shortage of statistics showcasing the rising cost of post-secondary education. Many people conclude that taking out student loans is no longer an option but a necessity. This can be a daunting task and a frightening debt to incur given that the cost of college is currently akin to the price of a small house. However, with careful planning and an eye on what you're doing, the debt can be fairly easy to manage.

If you find yourself in need of a student loan don't worry, you're in the majority here; 2008 estimates reveal that more than 66 percent of individuals in the U.S. take out student loans [source: NPSAS]. If you're among the 66 percent, the first numbers on a loan agreement you'll want to look at are the stipulations in grace periods and the length of repayment. Federal Student Loans offer a grace period while you're in school and for the months immediately after. This means that while you're attending college, you won't need to worry about making payments. Grace periods following your graduation or if you leave school for any reason depend specifically on the loan, so be sure to research and understand your loan before signing up.


Federal Loans come in both subsidized and unsubsidized. Subsidized loans don't start to accrue interest until after you graduate, whereas unsubsidized will accrue interest starting from the moment you take out the loan. Private loans are an option as well, but often don't carry the guarantee of a low-interest rate like federal loans do. However, if you'd like to take out loans through your bank or elsewhere, they'll often have a variety of repayment options.

While you're in school, keep an eye on your loans. This can be done through the National Student Loan Data System Web site. There you'll find up-to-date numbers on the loans you take out, the interest they've accrued and what your total debt is. It might not seem like much, but knowing the amount you owe will be a helpful tool throughout your loan management.

You're getting ready to graduate and loan repayment looms in your future. What's next? How do you get started repaying the money you borrowed?



After-school Assignment Number One: Repay Student Loans

If you take out Stafford Loans, the first thing to do after you graduate is attend exit counseling. These meetings resemble the entrance counseling you took when you first started taking out loans except now you'll be able to see the total amount you owe and choose a method of loan repayment. Depending on the type of loan, you'll have several different repayment options available to you:

  • Standard repayment - With this plan, you'll be paying a fixed amount monthly for up to 10 years. This is a great idea for those who have taken out small loans or who find themselves in a lucrative position immediately following graduation.
  • Extended repayment - This plan functions the same as standard repayment with the exception that the payment period can be stretched out to between 12 and 30 years.
  • Graduated repayment - This plan is structured for people who anticipate a need to start out with a modest repayment fee but will be able to increase that amount over time. The payments start low and gradually increase every two years. The term is between 12 and 20 years depending on the amount borrowed.
  • Income-contingent repayment - The income-contingent plan bases monthly payments on your income in relation to the amount of debt. Monthly payments are adjusted every year to match your changing income and, after 25 years, any remaining debt is discharged. This repayment plan is only available to direct loan borrowers.
  • Income-sensitive repayment - If you didn't take out a direct loan, you may have taken out a Federal Family Education Loan (FFEL). If so, this repayment plan might be an option for you. It's structured the same as the income-contingent plan but the loan term is only 10 years.
  • Income-based repayment - This method of repayment is available to both Direct Loan and FFEL borrowers. It's structured the same as income contingent but has lower monthly payments.

These repayment options offer a versatile plan for everyone, but that doesn't mean you won't run into difficulties in repayment at some point. Luckily, lenders have acknowledged economic hardship and have options in place should the need arise. But if you figure out how to create a budget and stick to it, you might never have to find out what those options are.


Student Loans, Budgeting and Deferment

Creating a budget can help you manage your student loans.
Creating a budget can help you manage your student loans.

The easiest way to manage paying back student loans is to create a budget. Most lenders will have a repayment calculator on their Web site, enabling you to pick a repayment plan and enter your monthly income to help you create a budget. Prepayment, typically, is not penalized. This means if you happen into a large sum of extra money, you can put it toward paying off your student loans without worrying about charges against your account.

If you're having trouble creating a budget and sticking to it, you might also consider credit counseling. Counselors will help in assessing your budget and creating payment plans that will work for your income. They'll also have insight into different methods of consolidation that may be helpful.


Keep in mind that your student loans might carry the lowest interest rate of all your debts. This may tempt you to blow off repaying your student loans so you can attend to that high-interest credit card debt you've also accrued. But resist the temptation, you'll want to pay off your loans as quickly as possible; even a low interest rate will add up quickly on larger loans. Furthermore, you don't want to default on the loan by not making payments.

If you find yourself in a tight economic position, it's important to consider a deferment of your student loans immediately. Lenders have all the incentive to keep you paying off your loan and will work with you to ensure you don't default on your loan. Deferments are utilized while you're in school but can also be used in the case of unemployment or economic hardship. Contacting your lender before you miss a payment is crucial, and you may need to provide proof of your circumstance.

The other option is forbearance. If you don't qualify for deferment, you may have this option, which is a temporary suspension or reduction in payments. A forbearance will commonly be granted if the loan debt exceeds 20 percent of the borrower's gross income. If you're not eligible for either of these, all is not lost. You could be eligible for a loan forgiveness program.


Special Considerations and Loan Forgiveness Programs

If you're a member of the U.S. military, you get a stipend for post-secondary education and the amount you receive depends on the length of service for which you have enrolled. This can be applied to a four-year college or a vocational school and can be an immense help in keeping loans down. You'll also find a number of scholarships and tuition assistance programs available to you. The difference between military tuition assistance and other programs is that you'll be serving with the military before enrolling in school.

Students who become full-time teachers at elementary or secondary schools are also eligible for loan forgiveness. Typically, these programs rely on you teaching in a low-income area, and by doing so, a portion of your Perkins Loans can be forgiven. There are several different programs available, both private and federal so if teaching is your goal, you'll have a few options from which to choose.


There are similar forgiveness programs for people who will be practicing law or medicine. Each offer different loan forgiveness programs for those who work in non-profit or public-interest positions. Persons in the medical field will also find the National Institute of Health's repayment program helpful, as it can pay up to $35,000 a year for those conducting medical research [source: National Institute of Health].

Volunteer work can be applied to loan forgiveness as well. Both AmeriCorps and the Peace Corps offer forgiveness programs. Volunteers in Service to America also has a program for those working with non-profits helping to eradicate hunger, homelessness, poverty and illiteracy.

Many of these forgiveness programs vary from state to state, so it's worth your time to research them after you graduate if you plan on entering a public service field.

What if you don't qualify for any form of loan forgiveness? Read on to see what happens when you default on a student loan.


Consequences of Not Paying Student Loans

What can you do when your loan is past due?
What can you do when your loan is past due?

If you've created a good budget and managed to read and understand the deferment rules of your lender, you shouldn't ever need to default on a loan. And, although many lenders will allow a delinquency in payment for up to 270 days before the loan enters default, you don't want to put yourself in this situation. Because, once you have defaulted on a loan, there aren't many options for turning back.

To keep a default out of your future, if you're late on a payment, the first and most important thing to do is call your lender and explain the situation. The bottom line is, lenders want you to pay off your loans, so they'll do what they can to help make that happen. However, if you fail to make a payment or do not request a deferment, your loan will be in default.


Student loans are one of the few types of loans not generally dischargeable with bankruptcy. If you default on a student loan, a number of consequences will result including:

  • Your loans will be turned over to a collections agency.
  • You can be sued for the amount of the loan.
  • Your wages can be garnished.
  • Your tax refunds can be intercepted.
  • You'll lose social security benefits.
  • Your credit will be damaged.

When your lender sends your loan to a collection agency, you'll have substantially more debt to deal with. This includes collection costs, late fees and other charges -- and of course, the remainder of what you still owe on the loan.

When deferment, forbearance and forgiveness aren't an option and you know a default is imminent, not all is completely lost. It is possible to consolidate your loans before you enter default. Since a consolidation is technically a new loan, you'll be given another period to begin repayment. This will buy you a bit more time to get your budget in order and begin repaying the loan.


Saving Money

As you now know, it's important to keep up with your loan payments. One way to do this is to consolidate all your loans into one. This is helpful if you've taken out multiple loans with multiple lenders. As the name implies, you'll be collecting all of your student loans together into one payment. You'll be able to do this service through the U.S. Department of Education, your bank, credit union or directly through your lender.

Most federal student loans can be consolidated. However, consolidation doesn't always mean you'll be saving money. It means all your loans will be collected together in one payment, making it easier for you to keep track of what you owe and less likely for you to become delinquent.


Consolidating your loans will also give you options when it comes to payment plans. This can reduce your monthly payments and extend the terms of the loan.

Before consolidating your loan, you'll want to look at the interest rates of the loans you've taken out. Consolidating isn't always the best option as it uses the average interest rate of all the loans. The original lender may also offer loan discounts a consolidating lender does not.

Online services offer an excellent means to manage your student loans. These services are usually offered by lenders and provide for simple management of your account as well as services like deferment and forbearance. Services like Sallie Mae will allow you to utilize combined billing for student loans without consolidating them. As with any bill, it's important to stay up to date on payments and payment options. Some lenders also offer discounts for setting up an automatic billing cycle.

Managing your student loans doesn't end with setting up a monthly billing cycle, settling on a repayment method and making payments, though. It's possible that your student loans could actually save you money; tax credits and deductions may be available to you on your yearly income tax. While you're enrolled in school, you'll be able to claim up to $2,500 in tax credits for tuition and related expenses for the first four years of college if your adjusted gross income is below $80,000 a year [source: ABC News]. Once you've finished with school, you'll be able to claim a deduction on your yearly taxes for interest paid on your student loans. It might not seem like much at first, but if you use your refund to pay off your student loans, you'll be able to take advantage of the "no prepayment penalties" aspect of your loan, and even more important, you'll get out of debt quicker.

Borrower benefits are also an enticing method loan providers will use to ensure on-time payment. These benefits can include a reduction in interest rate or rebates if you make payments on time. Although these aren't as popular as they used to be, certain lenders still offer discount services for those who make payments on time and it may be worth discussing these options with your lender.

For more information on student loan management and other personal finance topics, visit the links on the following page.


Lots More Information

Related HowStuffWorks Articles

  • Association of American Medical Colleges. "Student Loan Repayment." (01/16/10)
  • CNN. "Money 101: Lesson 2 Making a budget." (01/16/10)
  • Federal Student Aid. "Loan Forgiveness for Public Service Employees." Feb. 2009. (01/16/2009)
  • Federal Student Aid. "Repayment Information." (01/16/10)
  • Federal Student Aid. "TEACH Grant Program." (01/16/10)
  • Federal Trade Commission. "Student Loans: Avoiding Deceptive Offers." (1/20/10)
  • Military. "Tuition Assistance Program Overview." (01/16/10)
  • Feldman, Carole. "Tax Credits For College Grow, Cover More Students." ABC News. 1/19/10. (01/19/10)
  • National Postsecondary Student Aid Study. "2007-8" (01/15/10)
  • National Center for Education Statistics. "Table 188." (01/15/10)
  • National Institute of Health. "Loan Repayment Programs." (01/15/10)
  • Nelnet Education Planning and Financing. "Repayment and Debt Management." (01/15/10)
  • The Project on Student Loan Debt. "Top 10 Student Loan Tips for Recent Graduates." (01/17/10)
  • Sallie Mae. "Managing Your Debt." (01/17/10)
  • Sallie Mae. "Repaying Your Student Loans." (01/17/10)
  • "Repay Your Loan." (01/17/10)