After graduation you'll begin the task of paying off your student loans. This is called entering repayment. The term repayment is used because your lenders made payments to you while you were in school in the form of money deposited into your student accounts at your university to cover tuition and other expenses, normally on a semester-by-semester basis. Then you have to repay the money that was loaned to you.
Luckily, your federal student loans are extremely flexible in setting up monthly payment amounts and the length of your student loan repayment schedule. In this chapter you will learn everything you need to know setting up your repayment schedule.
When Payments Begin
After you graduate, the government doesn't expect you to start paying back your loans before you've had time to find your first post-college job. Thus, a grace period of six months is standard before you enter the repayment phase. Perkins loan borrowers get nine months.
How Repayment Works
Each lender sets up a 10-year repayment schedule based on the amount you owe it. However, keep in mind that you may owe amounts to other lenders, all of whom start collecting six to nine months after graduation. Unless you consolidate your loans, you could be making several separate payments to for 10 years. (For more information on consolidation, see Should You Consolidate Your Student Loans? and Debt Consolidation Made Easy.)
Repayment Options: Direct Loans vs. Government-Guaranteed Loans
While all federal loans are guaranteed by the government and have the majority of the same contract terms (no matter which lender you choose), direct loans come directly from the government and offer additional repayment options to the standard repayment plans offered by all lenders.
Repayment Schedules Available
- Standard Repayment
Standard repayment is the basic financial aid plan where you have a fixed payment for 10 years.
- Graduated Repayment
Graduated repayment is available for both extended (consolidated) repayment and standard repayment. With graduated repayment plans, your payments start out low and increase every two years. However, according to the Department of Education Direct Lending website, the payments will never be more than three times greater than any other payment. The advantages to a graduated program are that you can slowly work student loans into your budget, paying more as your income, theoretically, gets larger over time.
- Income-Contingent Repayment Programs
Programs are available to help graduates who pursue careers, especially in public service, where their income isn't enough to cover standard loan payments. Income-contingent payments are offered only by direct loans. Income-sensitive programs are also offered by private lenders who offer federal student loans. Income-based payments are available from both direct lenders and private lenders who offer federal loans. It is very similar to income-contingent repayment but uses a different formula. Ask your lender to go over all your options to find the repayment plan that helps you the most. The repayment program we'll address in this tutorial is income-contingent.
Income-contingent payments are designed to help former students who are having trouble making payments. This government program sets a payment that is the lesser of:
a) 20% of your monthly discretionary income per payment, or
b) payments spread out over 12 years.
Your maximum repayment period is 25 years. If your income-contingent payments don't pay off your loans in 25 years, the remainder of your loan is forgiven at the end of your repayment term.
- If your income increases, your payment could be well above what you would normally pay per month. While you will never pay more than you owe, this could adversely affect saving for retirement, for your child's education or for paying off high-interest credit cards. However,you are allowed to change repayment schedules once per year.
- Your payment may not be large enough to cover the interest accumulated on your loan. Interest is capitalized once per year.
- Planning can be more difficult for faster repayment because your payment can vary quite a bit from year to year based on your annual income.
- Any amount that is discharged after 25 years will be taxed as income.
Choosing the right repayment option is as important as choosing the right balance of federal and private loans. Study all options and then get repayment advice from your college's financial aid counselor, friends currently in repayment or family members with financial expertise. Click here for a federal chart that compares the options.
Student Loans: Repayment During Financial Hardship