Student Loan Payment: How it Works

Federal Education Loans Are Usually Best

There are several important decisions you can make during your college career that will have a significant impact on your future financial situation. Number one is to choose federal education loans over private student loans. Number two is to be familiar with the variety of loans available.

For example, some of the most common federal loans are:

• Perkins Loans. These are low interest loans (usually about 5%) for students with exceptional financial need. The government pays the interest while you are in college.
• Stafford Loans. Also low-interest government loans, these are available to all students. There are two versions:
  • Subsidized Stafford Loans, where the government pays the interest while you’re in college, and
  • Unsubsidized Stafford Loans, where you are responsible for paying the interest while in school. You can add the interest to the loan balance and pay it later, if you choose.
• PLUS Loans. These are low-interest loans available to graduate students, professional students, and the parents of undergraduates.
• Consolidation Loans. After graduation, consolidation loans become an option. This type of loan allows you to combine all your student loans into one giant loan. You can then, if you need to, extend the length of the loan to up to 30 years and lower your monthly payments. Beware though, as this will also increase the total amount of the loan by increasing the amount of interest you are paying.

Private Loans May Be Necessary

Non-governmental loans are not regulated and will follow market conditions when it comes to interest rates and other terms. With a little shopping around, you might be able to find good deals, discounts, and incentives. For example, some private lenders offer discounts if you sign up for automatic payments. It’s always worthwhile to compare these private loans with the government loans available to you and choose the best deal.

Common-Sense Rules for College Loans

Follow these rules for the best college-financing plan:

• Live as cheaply as you can in college. You’re living on borrowed money, so keep it under control.
• Know your loan repayment plan. Map out how much you’ll have in debt and how much you’ll need to repay every month. Factor that into your salary needs after graduation.
• Remember that you can deduct up to $2,500 per year of education loan interest payments. Check IRS Publication 970, Tax Benefits for Education.
• If your debt load is starting to feel too great, look into an income-based repayment (IBR) plan. This option allows you to design a repayment plan based on your income.
• If you’re still in school and feeling stressed by the number of loans you have, visit the financial aid office to see if there’s some way to reduce your borrowing.

Keep in mind that there are ways to reduce or cancel your loans if you need to take advantage of them. You might want to consider them even if you don’t need to, since many provide great experiences and opportunities to contribute to the greater good. They are:

• Deferment. You don’t need to pay your loans while in graduate school, the military, the Peace Corps, or various other public service programs.
• Cancellation. You may be able to cancel your loans if you participate in some government programs, for example, by teaching in low-income areas. If you are interested in this option, look into Public Service Loan Forgiveness (PSLF), which offers a range of jobs where your debt will be forgiven after a certain number of years of qualifying employment.

Related Articles:

College Student Loans

Important Info for Student Loan Borrowers

Resources:

Loan Repayment and Debt

Income-Based Repayment (IBR)