Student loan repayment process: Everything you need to know

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Student loan repayment is at the top of the to-do list for many new graduates. How fast you eliminate your debt, however, depends on several factors, like income, loan type, interest rate and your personal financial goals.

Whether you’re graduating this December or want to get ahead of the curve before your spring graduation, here are a few things to keep in mind before starting your student loan payoff.

What does repayment mean for student loans?

When borrowing student loans, you’re agreeing to repay a fixed loan amount (the principal), plus interest (based on a fixed or variable interest rate percentage). You’ll also have to repay your total student loan debt within a specific time period.

Student loans can be either federally or privately owned — and depending on the type of loan you have, the student loan repayment process varies.

Federal student loan repayment

Most undergraduate students in the United States have either subsidized or unsubsidized federal loans that are provided by the government.

For subsidized loans, the government pays the interest for you while you’re in school, during your six-month grace period after graduation and while your loan is in deferment. For unsubsidized federal loans, you’re responsible for the interest that accrues as soon as funds are disbursed.

Federal loans don’t require a co-signer and are put on the standard repayment plan by default.

3 ways to repay your federal student loans

1. Standard repayment plan

A standard repayment plan divides your total student debt equally across a 10-year term. This option makes loan payments predictable, saves you more money over time and gets you out of student debt fastest.

Eligible loans: Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Stafford Loans, PLUS loans and all consolidation loans.

Time frame: 10 years; up to 30 years for Direct Consolidation Loans.

Takeaway: If you can afford higher monthly payments from the get-go, a standard repayment plan is the most affordable long-term option.

2. Alternative repayment plans

Two other alternative repayment plans for federal student loans are graduated and extended plans. A graduated repayment plan starts you out with small payments that slowly increase over time (up to 10 years). An extended repayment plan lets you repay your loan balance over 25 years.

Eligible loans: Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Stafford Loans, PLUS loans and all consolidation loans.

Time frame: 10 or 25 years; up to 30 years for Direct Consolidation Loans.

Takeaway: These plans might be useful if you don’t have a high-paying job immediately out of school but expect to earn more as you establish your career; however, you’ll ultimately pay more over time than with other plans.

3. Income-driven repayment plans

Federal loan borrowers can also choose among four income-driven repayment (IDR) plans: Pay As You Earn Repayment Plan, Revised Pay As You Earn Repayment Plan, Income-Based Repayment Plan and Income-Contingent Repayment Plan. These plans revise your monthly student loan payments based on your income and family size.

Eligible loans: Direct Subsidized and Unsubsidized Loans, student PLUS loans and student Direct Consolidation Loans.

Time frame: 20 or 25 years.

Takeaway: If you don’t have a steady income, it may be best — at least in the short term — to choose an IDR plan. You’ll also need to get on an IDR plan to pursue federal student loan forgiveness programs, like Public Service Loan Forgiveness.

Private student loan repayment

Private loans are provided by private financial institutions. Eligibility requirements, terms and rates vary by lender. Private student loans also require a credit check or co-signer with strong credit. Unlike federal loans, private loans aren’t required to offer borrower protections (such as deferment or forbearance options), so you will have to contact your lender directly for options if you’re having trouble paying your loans.

Ways to repay your private student loans

Unlike federal student loans, private student loans don’t have a standard student loan repayment process. However, they may have unique student loan repayment plans that other lenders don’t offer.

For instance, some private lenders require you to start repayment as soon as funds are disbursed, while others let you make interest-only payments while in school or defer any payments until you leave school. Others may give you the option to pay interest plus a small monthly payment — like $25 — while you’re in school in order to begin chipping away at your balance early.

When planning your private student loan payoff, it’s best to speak to your lender directly to learn more about your loan repayment options.

What happens if you never pay your student loans?

If you never pay your student loans, you will go into default. For most federal student loans, you’ll default after 270 days of nonpayment, although loan servicers may declare a Perkins loan defaulted if it’s not paid by the due date. For private lenders, the timeframe may vary.

The default is reported to credit bureaus, and your credit will be adversely affected. This mark on your credit report makes it harder to borrow credit and can make you ineligible for additional financial aid.

Your wages can also be garnished, and lenders might send your loans to collections or take legal action. If you default on federal loans, you’ll lose protections, like deferment and forbearance, and the entirety of your unpaid balance will immediately become due.

Next steps

There are a few factors to consider when deciding on a student loan repayment plan, including whether or not you have a job lined up after graduation, the dollar amount of your loans and more.

Here are some additional tips as you plan for the student loan repayment process:

  • Make interest payments. If you have the option and can afford it, start making interest payments immediately. Doing so avoids compound interest — in other words, paying interest on your unpaid interest.
  • Consider deferment or forbearance. If you’re facing financial hardship and can’t make your loan payments, reach out to your lender about deferment or forbearance options. This lets you temporarily pause or lower your monthly payment for a period of time. You may still accrue interest on your loans.
  • Refinance your student loans. A student loan refinance can help lower the cost of your student debt in the long run by lowering your interest rate. However, be aware that if you refinance federal loans, you’ll have to use a private lender, meaning you’ll lose benefits like income-driven repayment, forbearance and loan forgiveness options. You also can’t switch back to a federal loan once you’ve refinanced.

Featured image by Hero Images of Getty Images.

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