Many students struggle with the cost of servicing their loans after graduation. While some students get lucky and find a good job quickly, other students are left unemployed and unable to pay their loans. There are several options that can enable students to pay their loans in a way that is adjusted for their income or graduated to account for lifetime earnings. Students who decide on a payment plan that is right for them can begin their transition into the working world with more money in their pockets.
Understanding the Basics
Different repayment options can be available depending on the type of loan that a student took out during school. The most common student loans are federal loans, which are the most flexible student loans. In contrast, private loans rarely offer any repayment options besides six months of deferment after graduation. Variable rate student loan payment amounts can fluctuate from month-to-month because they are indexed to average interest rates in the bond market. When interest rates go up, former students could find themselves facing an increased monthly payment. Current students should avoid private loans as much as possible while in school to prepare for the possibility of financial hardship later in life.
A student borrower’s first responsibility after graduation is to contact the lender and inform them that they have graduated. Lenders will usually inform borrowers about their repayment options immediately. In some instances, borrowers may need to work with different company, called a loan servicer, that specializes in managing the repayment process. Typical repayment options include:
- Standard repayment: Students who do not foresee any trouble repaying their loans can choose a standard monthly payment that continues for 10 or 15 years.
- Variable interest: Variable interest plans repay the same amount of principal each month, but the payment amounts vary for the borrower.
- Graduated repayment: Some student loans allow borrowers to repay their loans with a monthly payment that starts out low and increases every year. This plan can make sense for students who expect their lifetime income to increase significantly every year.
- Extended repayment: Most lenders are happy to decrease monthly payments by extending the term of the loan, but keep in mind that this means paying more interest in the long run.
Choosing an Option
Principal balances can be repaid at any time, so it is usually recommended for borrowers to choose a longer-term repayment plan if the interest rates are the same. By choosing this option, borrowers can simply pay more when they have extra money without being legally obligated to pay a higher amount. Borrowers who took out loans without a co-signer should plan on refinancing once their credit rating increases. Plans that are adjusted for income are usually recommended for borrowers who do not foresee enough income to comfortably make their monthly payments.
Borrowers should remember that they have to keep their long-term interests in mind when deciding on a student loan repayment plan. Some plans do not allow borrowers to change their plan once one has been selected. Students who choose a high, fixed-rate payment, therefore, could face unaffordable monthly installments later down the road. In contrast, it’s also important to remember that loans must be repaid as quickly as possible to prevent interest from compounding. Striking a balance between rapid repayment and risk mitigation is usually recommended for most borrowers.