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What You Need to Know About Student Loan Repayment

The average cost of tuition at public colleges and universities increased by 3.1% for the 2013-14 school year and tuition rates were up 3.8% at private schools. With the cost of a college degree at an all-time high, more students than ever are turning to loans to fund their education. By the time graduation rolls around, they’ve racked up thousands of dollars in debt that now needs to be repaid with interest.

What Will It Cost to Go to School?

For many new grads, receiving that first student loan statement in the mail can come as a shock. Knowing what to expect before your repayment period kicks in can potentially save you money and help you to avoid any unpleasant surprises.

What is the grace period?

Generally, you’re not expected to start repaying your federal student loans until after you graduate unless your enrollment status drops below half-time. The grace period is the amount of time you have before you’re expected to start making payments on your loans. The length of the grace period usually depends on the type of loans you took out.

For Direct loans and Stafford loans, the grace period is six months. That includes both subsidized and unsubsidized loans. If you took out a PLUS loan, the repayment period begins once they’re fully disbursed but you may be able to put off making payments through deferment. If you received a Perkins loan, you’ll have to check with your school to find out how long the grace period is. Keep in mind that for most loans, interest will still accrue during this time.

5 Ways to Make the Most of Your Student Loan Grace Period

What are my repayment options?

There are several payment plans available for federal student loans. The standard repayment plan is available if you took out Direct, Stafford and PLUS loans. The minimum you’ll pay is $50 per month and the repayment period lasts up to ten years. Your payments will be higher on the standard plan but you’ll pay less in interest.

Other payment options include the graduated repayment plan, an extended repayment plan, Income-Based repayment, income-sensitive payments, income-contingent payments and the Pay As You Earn program. With the income-based, income-contingent and Pay As You Earn options, you may be eligible to have part of your student loan debt forgiven but you could end up owing federal income tax on any amount you don’t pay.

How do I make my payments?

When you take out federal student loans, your account is assigned to a loan servicer by the Department of Education. The loan servicer is responsible for distributing loan money to your school, helping you choose a repayment option and sending you your monthly bill. When you pay back your student loans, you pay the money to the loan servicer not the federal government.

Can I Afford My Student Loan Payments?

Depending on the loan servicer, you may have the option of mailing your payments, paying online or setting up automatic withdrawals from your bank account. In most cases, you may be able to get a discount on your interest rate when you sign up for the automatic payment option.

What happens if I can’t pay?

If your monthly payments are high because you took on a lot of debt or your income just isn’t enough to keep up, you need to let your lender know sooner rather than later. Your loan servicer should be able to offer you some options to keep your debt from spiraling out of control.

Deferment, for example, allows you to put off payments temporarily if you’re experiencing a financial hardship. During a deferment period, your interest stops accruing and no payment is due. If you don’t qualify for a deferment, you may be able to get a forbearance from your loan servicer. During the forbearance period, you won’t have to make any payments but the interest on your loans will keep adding up.

Dos and Don’ts of Student Loan Repayment

Keep in mind that if you’re not paying your student loans and you haven’t requested a deferment or forbearance you run the risk of defaulting. Default can have a negative impact on your credit, make you ineligible for additional student loans, result in the seizure of your tax refund and subject you to collection actions, including wage garnishment.

Photo Credit: flickr

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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