Terms to Know for Planning College Loan Repayments

By on January 6, 2018

If you’re considering taking a student loan, you will need to learn more about how that student loan is going to affect your finances after college and how to keep on top of those debts.

If you were like most Gen-X , Gen-Y or Millennial students, you took loans to finance your education, and graduation doesn’t just lead to an open road, it also comes with huge financial obligations in the form of debt. If you’re thinking about taking a student loan you might want to sit down and do a cost-benefit analysis of what the degree will give you and what it will cost you. Consider things like the amount of interest you’ll be charged on your loans, your potential salary after graduation, what the current and projected job market looks like in your field and your current living expenses. From there, you can get a clearer picture of your postgraduate financial life.

Grace Periods

This is the time you have between graduation and the start date for loan payments.  If you take a Stafford loan, you will have a 6-month grace period after you graduate, leave school, or drop below half-time enrollment before you will be required to begin repaying the loan  Keep in mind that this is not the same for private loans  issued by banks or credit unions, which often have no grace period at all and you may be required to begin repayment during school or immediately after you graduate. Check with your lender to learn the exact terms of your loan.

Loan Consolidation

This allows you to combine your federal student loans into a single loan with one monthly payment which is usually lower than the standard payment option. However, this option usually means stretching out the payment term, which could end up costing you more in the end, but if you’re strapped for cash or think you may be in the future, this may be a viable option.

Interest Rates

Federal loans (i.e., those given out by the government) often have lower interest rates than private ones (i.e., those given out by a bank). For this reason, it may make sense to dedicate more money to paying off your private loans in the beginning to pay off the highest interest loans first – saving you money in the long run.

Payment Plans

Unless you delineate otherwise, your loan provider will automatically enroll you in their standard repayment plan, however, there are a number of other payment plan options for unique circumstances. These plans usually have caveats, so read them carefully and figure out what makes the most sense for you.

  • Standard Repayment – Under this plan you will pay a fixed monthly amount for a loan term of up to 10 years. Depending on the amount of the loan, the loan term may be shorter than 10 years. There is a $50 minimum monthly payment.
  • Extended Repayment – This is like standard repayment, but allows a loan term of 12 to 30 years, depending on the total amount borrowed. Stretching out the payments over a longer term reduces the size of each payment, but increases the total amount repaid over the lifetime of the loan.
  • Graduated Repayment – This plan begins with an initial low payments, which gradually increase every two years. The loan term is 12 to 30 years, depending on the total amount borrowed and the monthly payment can be no less than 50% and no more than 150% of the monthly payment under the standard repayment plan. The monthly payment must be at least  $25 or cover the interest that the loan accrues.
  • Income-Contingent Repayment – These payments are based on the borrower’s income and the total amount of debt. Monthly payments are adjusted as the borrower’s income changes. The loan term is up to 25 years after which any remaining balance on the loan will be discharged. The write-off of the remaining balance at the end of 25 years is currently taxable. There is a $5 minimum monthly payment and is only available for Direct Loan borrowers.
  • Income-Sensitive Repayment – As an alternative to income contingent repayment, FFEL lenders offer borrowers monthly payments to a percentage of gross monthly income. The loan term is 10 years.
  • Income-Based Repayment – This payment plan caps the monthly payments at a lower percentage of a narrower definition of discretionary income.  It is available in both the Direct Loan and FFEL programs. Income-based repayment is like income contingent repayment, but caps the monthly payments at a lower percentage of a narrower definition of discretionary income.

Principal Balance

The outstanding amount of the loan, on which the lender charges interest. As the loan is repaid, a portion of each payment is used to satisfy interest that has accrued, and the remainder of the payment is used to reduce the outstanding principal balance.

Repayment Period

The period that commences after the expiration of the grace period during which the borrower must make regular installment payments of principal and interest. The maximum term of repayment is 120 months. With certain loans, the repayment period begins immediately after disbursement of the loan (exclusive of statutory deferments), since they do not receive a grace period.

Stafford Loan

The basic guaranteed student loan (previously known as GSL).

Subsidized Loan

A loan eligible for interest benefits paid by the federal government. The federal government pays the interest that accrues on subsidized loans during the student’s in-school, grace, authorized deferment, and post-deferment grace periods, if the loan meets certain eligibility requirements.

Unsubsidized Loan

A loan procured from Stafford or Federal PLUS on a non-need-basis is unsubsidized. The borrower is responsible for paying the interest on an unsubsidized loan during school, grace, and deferment periods, in addition to repayment periods.

Here’s a Tip: Create a spreadsheet with your current and projected salaries, monthly expenses and the amount put towards savings each month. Now you will have an idea of an amount you can devote to paying off student loan debts every month.

If you can afford it, you might want to consider paying a bit more than the agreed upon amount each month. When you do pay extra, specify in writing that you want the extra amount applied to the principal, thereby reducing the balance of your loan.

Take the next step - Let's talk!

Remember to speak with your financial, legal or tax professional for more information about the topics which interest you. Here are a few ways for you to share your ideas, learn more and interact with FinancialSafetyNet members, authors and expert advisors.
Have a question, but don't want to share it with everyone? Contact a financial advisor.
Want to contribute to the conversation publicly? Submit a comment.

Submit A Comment

About Amanda Jensen

FSN college advice columnist - Amanda gives parents and students knowledgeable advice on college planning, tuition financing and scholarships. With up to date and accessible information covering everything from personal finances to federal government policies, she is determined to make the college experience a painless one for all party's involved. You can find Amanda on !

You must be logged in to post a comment Login

Leave a Reply