Once you have finished school, it’s time to start repaying your student loans. Most – but not all – student loans come with a six-month grace period, during which you do not have to make any payments but will be charged interest.
If you do not make payments during the grace period, that interest will be added to your loan balance, and you will pay interest on that interest. It is in your best interest to start making payments as soon as possible.
With private loans, you have only one choice for repayment, based on the terms you agreed to when you signed the loan.
Federal loans offer much more flexibility. You can stick to the standard plan you originally signed up for, which is most beneficial to your long-term finances if it fits within your budget.
If you are having trouble making ends meet and making your loan payments on time and in full, you may be able to switch to a more flexible plan that offers more wiggle room for your budget.
How To Make Payments?
Loan payments start with your loan servicer (or servicers). They’ll let you know exactly how to make your payments, including how much you have to pay and when your monthly payment is due. They’ll also let you know what you can do if you can’t make your scheduled payments, as long as you contact them.
Making the payments is easy; remembering to make the payments or having enough money to cover the payments can be harder. To keep your loan balance from increasing and your credit score from tanking, do everything you can to stay on top of your student loan payments. Learn more about how to build your credit.
Know Your Servicer
Most student loans are handled by servicers (companies that receive and manage payments) rather than the original lenders; they’re sort of like middlemen standing between you and the lender.
Your servicer is supposed to help you stay current with your loan, help you switch to a different repayment plan if you can’t afford your payments, and offer certification for loan forgiveness programs.
To find your servicer, log on to the National Student Loan Data System (https://nslds.ed.gov) with your FSA ID (the same one you used for the FAFSA) and click on the “financial aid review” button. You’ll find an “aid summary” chart with details about your student loans. If you click on individual loans, you’ll find the loan servicer.
Making the Payments
There are basically three ways to make your student loan payments:
- By check
- Making online payments
Many servicers offer an interest rate discount (usually 0.25 percent) for borrowers who enroll in autopay. This option also ensures you’ll never miss a payment or a due date. Make sure to keep enough money in your account to cover your monthly payment so you won’t get hit with overdraft fees.
If you opt for paying by check or paying online (where you are in charge of the payments), make sure you do pay every month on time and in full. You are responsible for these payments even if you don’t get a bill, so check in with your servicer if you haven’t gotten one.
The Standard Repayment Plan
The standard plan will cost you the least amount of money overall, but it does come with the biggest monthly payments. The payments will stay the same until the loan is paid off. Standard plans come with a ten-year payback period, which officially begins six months after you leave school. Here, “leaving school” means graduating, withdrawing, or cutting back to less than a half-time schedule.
Figuring Out the Interest
Like other term loans (loans that have to be repaid over a specific amount of time), student loans amortize based on the interest rate and loan term. While your loan is in good standing, the interest accrues daily (there’s interest charged every day) but it doesn’t compound (you don’t pay interest on the interest).
For most loans, that interest starts the day the loan gets disbursed, so you’ll end up owing more than you borrowed by the time the first payment is due. You can figure out the interest on your loan with a little math. Divide your interest rate by 365 to figure out the daily rate.
Multiply that daily rate by your current loan balance to find your daily interest amount. Then multiply the daily interest amount by the number of days since your last payment (usually thirty days). The number you get there will be the interest portion of your loan payment. The rest of your payment goes toward principal, unless you have any outstanding fees.
Pay As Fast As You Can
Since federal student loans don’t have prepayment penalties, you can start making payments as soon as you want and as often as you want. Every month, you’ll have the option to pay extra, and that amount will reduce your loan principal balance. If you make additional payments during the month, they’ll be treated as normal (principal and interest) payments unless you specifically instruct the lender to apply the whole payment to principal (check with your lender about how to do this properly).
The faster you pay down the principal, the less you’ll pay in interest, and that means more money to put toward your financial freedom.
Learn more about how to pay off your student loans fast.
Special Payment Plans
For a lot of people, standard student loan payments cripple their budgets, especially when they’re fresh out of school. That’s why federal loans offer several repayment plans and let you choose whichever one you want. You can also switch plans at any time for free. If you’re thinking about one of these, try out the repayment estimator (at www.studentloans.gov ) to see what your new payments might look like.
The seven nonstandard repayment plan options include:
- Graduated repayment plan, where payments start out small and increase every two years with the goal of having the loan paid off in ten years.
- Extended repayment plan, where the loan term can be stretched out for up to twenty-five years to keep payments low for borrowers who owe more than $30,000.
- Pay As You Earn (PAYE) plan, where monthly payments are calculated every year to equal 10 percent of your discretionary income (according to US Department of Education guidelines), but never more than they would be under the standard plan.
- Revised Pay As You Earn (REPAYE) plan, where monthly payments are calculated every year to equal 10 percent of your discretionary income (and can be more than standard plan payments).
- Income-based repayment (IBR) plan, where monthly payments are calculated every year to equal 10 percent of your discretionary income (15 percent if your loans are from before July 2014).
- Income-contingent repayment (ICR) plan, where payments equal the lesser of 20 percent of your discretionary income or what your monthly payments would equal calculated over twelve years.
- Income-sensitive repayment plan, where your loan term is increased to fifteen years and your monthly payments are recalculated annually based on your income.
While it sounds like some of these are the same, they have different requirements and some slightly different terms. Many of these plans offer loan forgiveness after twenty years of payments. Keep in mind that with all of these alternative payment plans, you’ll end up paying more overall than if you’d gone with the standard plan.
Not all borrowers will qualify for all of the repayment plans. For more detailed information on all of your repayment options, visit www.studentaid.ed.gov.
Learn more about how to reduce student loan debts.