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Student loans can impact your financial well-being and career goals, making it critical to understand your loan terms and repayment obligations. Federal student loans will typically enter repayment shortly after your enrollment status changes. To better manage your loans as you switch from school to the working world, look for opportunities to simplify your payments and repay your debt faster.
Key Takeaways
- You must begin repaying your federal student loans shortly after you graduate, drop below half-time enrollment, leave school, or your loan enters repayment.
- For federal student loans, you can choose either a fixed payment or income-driven repayment (IDR) plan.
- Paying down your loans faster with larger payments, through refinancing, and/or by enrolling in autopay can help you spend less of your disposable income in the long run.
Understand When You Need to Start Making Payments
You must begin making payments on your federal student loans if any of the following apply to you:
- You graduate
- You drop below half-time enrollment
- You leave school
You have a six-month grace period for direct subsidized and direct unsubsidized loans and up to nine months for Perkins loans, depending on the school. The grace period gives you time to find a job so you can begin repaying your loan.
However, PLUS loans have no grace period if you borrowed the money for an undergraduate degree but offer an automatic six-month deferment for graduate or professional studies.
Know Your Debt and Repayment Plans Available
You have the choice of two repayment plans. The first option is a fixed repayment plan, which features fixed monthly payments, helping you to know exactly how much you’re paying each month. There are three types of fixed repayment plans:
- Standard: Fixed payments allow you to pay off your loans within 10 years (10 to 30 for consolidation loans)
- Graduated: Lower payments initially, increasing every two years so you can pay off your loans within 10 years (10 to 30 years for consolidation loans)
- Extended: Fixed or graduated payments so you can pay off your loans within 25 years
The second option is the income-driven repayment (IDR) plan, which is based on your income and family size. To qualify, you must apply and provide your loan servicer with updated information about your income and family size, which is used to calculate your payment amount. These details must be submitted, even if there are no changes. IDR plans include:
- Income-Based Repayment (IBR) Plan
- Income-Contingent Repayment (ICR) Plan
- Pay As You Earn (PAYE) Repayment Plan
- Saving on a Valuable Education (SAVE) Plan
Important
The future of the current IDR plans is uncertain following a federal court injunction that halted the United States Department of Education from implementing the Saving on a Valuable Education (SAVE) plan and parts of other plans.
If you don’t select a plan, you will be automatically enrolled in the standard repayment plan. This basic plan encompasses fixed payments for up to 10 years or between 10 and 30 years for consolidation loans.
Making Payments
Billing of your federal student loan is handled by a loan servicer contracted by the Department of Education. Your loan servicer will contact you when your loan goes into repayment, work with you to set up your repayment options, and help you with anything related to your student loan.
If you have a direct or FFEL loan owned by the Department of Education, you must send your payments to your loan servicer. Payments for FFEL loans not owned by the Education Department go directly to the lender. However, for federal Perkins loans, send your payments to the school or the billing agency assigned by your school.
How to Pay Off Your Loan Faster
Since the average borrower typically takes 20 years to repay their student loans, it’s completely understandable to feel anxious or stressed about your debt. The good news is that you can cut down your repayment time by doing the following:
- Make extra payments: Making additional payments on top of your monthly payment will reduce the total interest you’ll pay, decrease the principal balance, and shorten your repayment time.
- Make bi-weekly payments: Divide your monthly payment by two and pay each portion every two weeks. By the end of the year, you’ll have made 13 monthly payments or one extra payment.
- Refinance your student loans: If you have a good to excellent credit score and steady income, refinancing can help you get a lower interest rate and lower your monthly payment. However, you may lose federal student loan benefits, such as loan forgiveness, since refinancing converts your federal student loans into one private loan.
- Enroll in autopay: You’ll get a 0.25% interest rate discount if you set up direct payments from your checking or savings account for your Direct loans. The discount reduces your interest and cuts your monthly payments.
What if You Have a Private Student Loan?
So far, the information we’ve discussed only relates to federal student loans made by the government and come with certain benefits and “terms and conditions that are set by law.”
As such, federal student loans differ from private student loans, which are offered by lenders such as banks, credit unions, and online lenders. Schools and state agencies may also offer private loans. With private student loans, the lender establishes the terms and conditions, including the borrowing limits, interest rates, and repayment terms.
The Bottom Line
Student loans can help you finance the cost of higher education, but the burden of student debt can be overwhelming once you graduate. Be sure to research your repayment plan and the options available to you. If you’re struggling to make your payments, contact your loan servicer immediately so they can assist you in getting caught up and avoid defaulting on your loans.
