Student loans come from two major sources: the federal government and private lenders. Both of these have completely different terms and conditions, interest rates and repayment plans. Federal student loans should be your first pick of the two. They offer lower interest rates and more flexible terms.
Take the time to learn about the different types of student loan repayment plans.
Federal Student Loan Repayment Plans
If you have federal Direct or FFEL loans, there are numerous options for you.
The Standard Repayment option is the default option. You’ll make equal monthly payments over a period of 10 years.
The Graduated Repayment option allows you to start off with lower payments that steadily increase until you pay your loan in its entirety. The lower initial payments make it easier for you to meet your monthly financial commitments while you are still new on the job scene. As your salary increases, your monthly payments also increase.
With Income-Based Plans, your monthly payments are calculated as a percentage of your monthly income. When your earnings are low, you make smaller monthly payments. Your income is reviewed regularly and when it increases, you make larger monthly payments. Income-based repayment plans ensure that you make your monthly payments while still having money to meet your other expenses such as rent, utilities, and groceries.
What Are My Private Loan Repayment Options?
When dealing with private lenders, there are four basic options for repayment. (Options will vary between lenders).
Immediate Repayment begins as soon as you take out your loan. Some students prefer this option so that they can pay down their loans while still enrolled in school. This will save money on your interest rate in the long-run.
Interest-Only Repayment allows you to pay only the interest while you are in school, and the remainder of the loan becomes your responsibility upon graduation. Though you don’t pay off the loan, paying the interest still helps you save money.
Partial Interest Repayment allows you to make lower monthly payments while you are enrolled, and the payment amounts increase over time.
With a full deferment, you do not any payments until after you graduate and become employed. However, what you must remember is that the interest starts accruing from the time you receive the money.
Which Repayment Option is Best for You?
It depends on your financial situation and what type of loans you took out, as well as where you live after graduation. At the end of the day, go with the repayment plan that makes the most sense with your income and budget. Don’t stretch yourself thin trying to repay your loan when you can opt for lower monthly payments. Pick the repayment plan that is most likely going to keep you from defaulting, which is the last thing you want. And again, pick federal student loans first before going to private loans. Federal loans are more standardized, forgiving, and usually have lower interest rates. Private loans and rates are dependent on the lender and your financial standing, which leads to a lot more variation.
