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What You Need To Know About Repaying Your Student Loans

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For those of you whom graduated this past June, the grace period on your student loans is coming to an end.  Starting in January, you will be responsible for paying back the principle and interest of your student loans every single month, faithfully and on time, until they are paid off in their entirety.

It’s a weighty responsibility, but there are a few things you need to know to make them a little more manageable.

1. Save money by setting up automatic withdrawals.
If you have a federal student loan (Perkins or Stafford), you are entitled to a discounted interest rate (usually .25%) when you sign up for automatic deductions from your checking account.  This is a great deal for you and one that you should definitely take advantage of — not only will you save money on interest payments, but you won’t ever face late fees because you were out of town or ran out of checks or just forgot to post your payment in time.

2. Pick the right repayment plan for your life.
You can chose from a number of repayment plans, depending on your current income, your expected future income, and other expenses.  Here’s a run-down on the options:

>> Level Payment Plan: The total amount of your loan plus interest is divided until 120 equal payments.  Then you pay the same amount every year, for 10 years, until the loan is paid off.  This plan is usually the fastest and least expensive way (i.e. the least amount of interest) to pay back your student loan.

>> Graduated Payment Plan: Your monthly payments start out low, when your income is lower.  Repayments gradually rise over the ten-year period, as your income increases.  The lower payments at the beginning mean that you will end up a paying a bit more in interest over the life of the loan, but the affordability when you are first starting out is a major plus.

>> Extended Payment Plan: If you have borrowed more than $30,000 in federal loans, you can stretch out your repayment from 10 years to up to 25 years. Your monthly payment will be significantly lower, but you will pay more in interest over the life of the loan.

>> Income Contingent Plan: If your income is low and your family’s budget is already stretched thin, you may qualify for significantly lowered payments, made over 25 years. After 25 years, the balance of your loan is forgiven — if you

3. Consider consolidation.
If you have multiple federal loans, you can consolidate them, giving you a single monthly payment.  And you can stretch out the repayment plan as long as you like — up to 30 years. Plus, Stafford loans taken out before 2006 have a variable rate.  Consolidation lets you lock in one lower rate.  The 2008-2009 rate is quite low: 4.21%.  The even better news is that if you consolidate during your grace period, you can lock in an even lower grace period of 3.61%.

4. Call your lender immediately at the sign of financial trouble.
If you are having financial problems of any kind, the first person you should call is your lender.  If you call before you start missing payments, you have a number of options, including deferment (your repayment and interest accrual are frozen during economic hardship) and forbearance (repayments are frozen, but interest continues to accrue.)

And on another note, I want to wish all of you students and parents a very happy new year! Cheers!

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