Student loans: what you need to know

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Student loans: what you need to know
Danielle Bly

Issue date: 2/26/10 Section: News

Student loan payments can be intimidating, but knowing your payback options and keeping organized can help reduce stress and interest owed.
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Every year you've applied and received your student loans to pay for tuition, never thinking about that dreadful day after graduation when your first payment is due. Paying off student loans can be intimidating, but with a little know-how and a lot of planning, you can better prepare for that first payment deadline.

First, remember that most student loans come with a grace period. You have enough to think about with moving out of college, starting a new job, and adjusting to life after college. For this reason, most student loans have a grace period between six and nine months, meaning you do not have to start paying back your loans until the end of the grace period. Use this time to understand your loans and research your payment options.

Next it's important to understand your repayment options. Many lenders give you a choice of how to pay back your loans so that you can choose which option works best for you. Listed below are a few of the most popular repayment options:

Standard repayment plan: This is the plan that comes with your loan and is often a fixed payment with terms around 10 years.

Graduated repayment plan: This plan starts with a low payment for the first few years of the 10 year loan, and payments increase toward the end of the loan. This can be helpful for people with low starting incomes who expect to have large pay increases within 10 years. However, you will end up paying more interest under this plan because you will accumulate more interest in the beginning of the life of the loan.

Extended repayment plan: This plan allows you to extend the life of your loan from 10 years up to about 30 years. This creates lower monthly fixed payments, but increases the amount of interest you'll pay over the life of the loan.

Income-sensitive repayment plan: This plan is only available with a select number of lenders and allows your loan payment to adjust to your yearly income. When you earn more, you pay more, and when you earn less, you pay less.

Loan consolidation: Although this is technically not a repayment option, it is helpful so that you can pay back your loans more effectively. If you have multiple loans from multiple lenders, consolidating your loans can be beneficial because it allows you to potentially reduce your interest rate and write one check per month for all of your loans. You must apply to consolidate your loans, and only certain loans qualify to be consolidated.

In order to choose the repayment option that is best for you, look at your budgeted income and expenses to determine how large of a payment you can afford each month. When inquiring to your lender about repayment options, be sure to ask your lender about other discounts and offers. For example, some lenders will slightly reduce your interest rate for directly debiting your payment from your bank account each month, or they may waive one or two monthly payments if you consistently pay on time each month.

When it comes time to make payments on your student loans, remember there are certain tax breaks that you can take advantage of. If you are single with an adjusted gross income (AGI) of less than $50,000, you can deduct up to $2500 of student loan interest is paid throughout the year. If your AGI is greater than $50,000, you may qualify for a partial deduction. Your lender should send you a Form 1098-E which shows the amount of student loan interest you've paid during the year.

If you find yourself in financial difficulty where you are unable to pay your student loans, you do have options. Do not simply fail to make payments without talking to your lender. There could be several options available to you, including deferment (a temporary reprieve from payments for a specific qualified reason - i.e. unemployment - for a specific time - usually 6 months), forbearance (a temporary reduction or reprieve from payments at the lender's discretion for a specific time), or cancellation (complete cancellation of the student loan for an extreme situation such as death or permanent disability of the borrower). In order to qualify for any of these options you will need to speak with your lender directly to apply.

Paying off your student loans seems overwhelming at first, but by staying organized and following these special tips you can be well on your way to financial freedom from your student loans.