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What are your repayment options?

If you have to borrow money to finance your college education, you need to know what your repayment options are.  (If you’re still considering your loan options, read about how to decrease your college debt and how to borrow wisely and repay responsibly.)

How much to pay

Your repayment will consist of the principal (the original amount you borrowed, for example, $3,000) plus interest (a percentage of what’s left of the principal, adding up over time). The faster you pay back the principal, the less interest you will have to pay since interest is accrued every month.

A lower monthly payment may seem attractive, but you will wind up paying a larger sum to the lending agent than if you have a higher monthly payment.

Types of repayment include:

  • Standard: Repay a set amount each month, including interest and principal. This results in the lowest overall cost of your loan.
  • Graduated: Repay a low rate each month for up to the first four or five years, then the standard amount. This applies to federal loans only.
  • Income-sensitive or income-based: Repay a lower amount based on your annual income. You must reapply for this option each year. This applies to federal loans only.
  • Extended: Repay your loan over a longer time period, starting with lower monthly payments that may be as low as interest only. Available for federal loans and some private loans.

Remember that you can apply to change your type of repayment at any time.

Read about budgeting to make sure you don’t commit to a repayment amount higher than you can afford. There are also many loan calculators to help you figure out the amount you should pay each month.

When to pay

If you have borrowed federal loans that are part of your financial aid package after you filed the FAFSA, such as the Stafford Loan or the Parent PLUS loan, repayment will begin when you are no longer a full-time student. If you take fewer than 12 credit hours in a spring or fall semester you will generally not be considered a full-time student. On federal loans there is a six-to-nine-month grace period between your change in status and when you have to start payments on your loans.

If you have borrowed private loans from another lender, repayment may begin earlier. You may have to start paying interest before the principal is due. Check with your lending agent to find out when repayment begins, and keep all paperwork on your loan.

On federal loans, you can also pay part of your loans before they are due (prepay) without any penalty. If you choose to prepay, you will not have to pay any interest on the amount that you prepay. Private loans may have a prepay option, too.

How to get tax benefits

You could earn federal tax credits or deductions if you are paying back education loans or currently enrolled in higher education. These include:

  • The American Opportunity tax credit provides up to $2,500 off your taxes.
  • The Lifetime Learning tax credit awards you up to $2,000 for qualified education expenses.
  • Tuition and fees deductions allow you to lower the amount of your income that is subject to taxes by up to $4,000 if you have paid for tuition and fees during the year.
  • Student loan interest deductions allow you to deduct up to $2,500 if you paid interest on a loan used for qualified higher education expenses, including tuition, fees, room and board or supplies.
  • If you have had your loans cancelled or have repayment assistance (for example, through a job), you may be eligible for tax free loan assistance.

How to defer payments for a period

In some situations you may not be able to pay your loan. For federal loans and some private loans, you can request a deferment so you do not have to make payments for a period of time. Reasons for a deferment include economic hardship or unemployment, military deployment, going back to school, taking an internship or enrolling in national service (such as AmeriCorps). Check with your lending agent about similar situations that may also be eligible for a deferment.

Remember, deferment is temporary and limited. Do not request deferment except in emergencies. You should have a plan for making payments once the deferment period is over.

You can also request forbearance on federal loans. Like deferment, you will not have to make payments for a certain period of time (usually one year or less), or you can opt for lower monthly payments. You will have the option to pay interest only during this time.

If you choose forbearance, you will pay more overall because interest will add up over time. Consider whether you can budget your income to make a payment each month instead.

More resources

Understanding your loans and repayment plans can be complicated. Check out these resources to help you understand what you owe and how to pay.

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