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Repaying Your Student Loans


By Melody Warnick

Your college diploma is a little piece of paper with a big impact on your financial future. Unfortunately, so is your student loan promissory note.

Now that you've graduated, it's time to pay the piper for the loans that have been putting you through school all this time -- and playing dumb or pleading ignorant isn't going to cut you any slack. Here's what you need to know to pay back what you owe and protect your financial future.

Figuring Out What You Owe
Most federal loan programs offer a grace period of between six and nine months after graduation before your repayment period begins. During that time, you should get a certified letter reminding you of your student loan responsibilities and spelling out a repayment schedule. Not getting a letter doesn't mean you're off the hook; you'll still be held responsible for missed payments, which can negatively affect your credit rating down the road.
Get ready by boning up on what kind of loans you have, who your lender is, how much you owe, how long you have to pay it back, what you should be paying each month, and what fees you're responsible for. To find out where you stand:

  • Dig up all the paperwork related to your loan, including the promissory note you signed at the beginning. Ask your parents, who may have been smart enough to file it all away.
  • Log onto the National Student Loan Data System. By entering in some personal information and your Department of Education PIN number, you can access a list of what you owe on all your federal student loans. (Note: If you don't have a PIN already, you may request one at the site.)
  • Contact your university's financial aid office. Government regulations require you to receive exit counseling from your school's financial aid office if you have federal student loans, but bypass any online options in favor of an in-person visit. A counselor will be able to provide information on private, nonfederal loans that have been disbursed to you through the university so that you can get in touch with your lender.

Picking a Repayment Plan
Although your student debt is just as serious as, say, your electric bill or your rent, you generally have more flexible options for repayment. Before your grace period ends, work with your lender to find the easiest plan to pay back what you owe without going broke:

  • Standard repayment. The most direct method of paying off your student loan, with a standard repayment plan you'll pay a fixed amount, at least $50, each month. You'll also have up to 10 years to pay off the loan. Although your monthly payments will be slightly higher than they would be under the other repayment plans, you'll wrap up the debt more quickly, which means you'll pay less in interest.
  • Extended repayment. As with the standard repayment plan, you'll still pay a set amount each month, but you'll have longer to pay off the debt: between 12 and 30 years, depending on how much you owe. It's a good idea if you have a hefty loan, but consider the extra interest you'll accrue.
  • Graduated repayment. Most recent college grads start out with a small paycheck that increases over time. The graduated repayment plan mirrors that expected salary life cycle. You'll start off making small payments in the first few years after graduation, then work up to larger monthly payments. While initially you'll be required to pay the interest only or half the payment you'd make under the standard repayment plan -- whichever is greater -- eventually you'll pay both interest and principal, up to 1.5 times what your monthly payment would be under the standard plan.
  • Income-contingent/income-sensitive repayment. Each year, you can have your monthly payments adjusted to an affordable level, an amount calculated using the adjusted gross income you reported on your tax return, your family size, your interest rate and the total amount you owe. As your payments increase or decrease along with your income, you'll have greater flexibility to chip away at your debt without stressing your family finances. Of course, the less you pay each month, the longer you'll have the debt.

Although you select a payment plan when you first begin repaying the loan, you can always switch if your financial situation changes. Not all plans are available for all loans, and some loans carry limits to the number of times you can switch repayment plans each year. Check with your lender for specifics.

Other Ways to Ease the Burden
Tacked onto your student loan are origination and administrative fees that can equal up to 4 or 5 percent of your loan's balance. But you may be able to reduce your fees by negotiating with a customer service representative at the loan-holding institution. Other lenders will shave a point off your current interest rate if you agree to make your loan payment online or allow the payment to be automatically deducted from your checking account each month. You can get time off for good behavior, scoring a reduced interest rate for making a certain number of consecutive monthly payments on time. Contact your lender about money-saving options, or if you have a Direct Loan, visit the Department of Education's website.

Another way to assuage your student loan pain: take advantage of tax incentives by deducting your student loan interest, up to $2,500 a year. The IRS publication Tax Benefits for Higher Education explains how you can take advantage of the tax break whether you have a federal or private loan.