Repaying Student Loans: What You Need to Know

Many students are happy to sign the loan documents that will enable them to get a college education, but when it comes time to pay off that loan, they may find themselves with a lot of questions. Here are a few ways to get a better handle on the repayment process.   

Determine the Terms 

Review loan documents for all your loans to see the balance, monthly payments and how many payments you have left. To find the information turn to your lender or, for federal loans, to the National Student Loan Data System at www.nslds.gov. Once you know how much you owe and what you’ll have to pay each month, you can include this information in your monthly budget.  

Pick the Best Repayment Plan 

Your initial loan payments will be calculated based on a standard 10-year repayment plan, in which your monthly bill will remain the same for the entire loan term. Other options include: 

  • A graduated plan, where your payments are lower at first and get higher over time. That may be a good choice if you expect your income to rise in the future—which is the case with most graduates—but you will end up paying a higher total loan amount with graduated payments because you’ll pay more in total interest. In addition, if your income does not go up as much as you expected, it may be tough to cover higher payments later.  
  • You can also lengthen the loan term for up to 30 years–and lower monthly payments–with an extended payment plan. Once again, you will pay more in interest than with a standard payment plan.     
  • An income based plan is available on certain federal loans. They are typically meant for borrowers with a high loan balance and loan payments are set at an amount based on your discretionary income.    

Find out if it Pays to Consolidate  

Student loan consolidation involves replacing all your existing loans with one large loan. Here are a few questions that will help you decide if it’s the right choice. 

  • Is there any upfront fee? Generally, you should not have to hand over any money to qualify for a consolidation loan. (There may be fees associated with some Stafford or PLUS loans, but they will be deducted from the money you receive.)  
  • What are the details of the new loan?  
    • The interest rate for a consolidation loan is the weighted average of the rates on all your existing loans, round up to the nearest 1/8 of a percent. That means the consolidated rate should be somewhere between the highest rate you are currently paying and the lowest. Find out what a change would mean to your monthly payments and your total loan balance to help determine if consolidation would be a better deal for you.  
    • If the loan term for a consolidated loan is longer—say 15 or 30 years instead of 10—your monthly payment amount will be reduced. This may make sense if you could benefit from lower payments now, but you believe that in the future your income will rise and perhaps allow you to pay off the loan early. However, it’s worth considering whether extending the loan term is a good deal, because you will end up paying more interest over time.  
    • Are there good reasons to consolidate private loans? Private loans (which you get from a bank or other lender rather than a government program) should be consolidated separately from federal ones, since they typically have higher rates, which would increase the weighted average you have to pay. As is the case with any loan, consolidation is worth considering if you can get a better rate or other favorable terms.  

Take Steps to Remedy a Default 

If you don’t make payments on a student loan for 270 days or more, the loan can be considered in default. As a result, you may be forced to repay the entire balance immediately or face having your salary garnished to repay the debt, among numerous other potential consequences. If you are having difficultly making payments, steps you can take to prevent default include: 

  • Repaying overdue balances.  
  • Changing your repayment plan to lower your monthly bills.  
  • Seeking a deferment that allows you to stop payments temporarily.  
  • Asking for loan forgiveness.  

It may be possible to resolve default by contacting the lender and negotiating a repayment plan or other settlement, or through loan consolidation.