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Student Loans - Part II: Repaying Your Student Loans

| September 10, 2019

Our previous blog on student loans addressed the different loan options that are provided by the Federal Government. The different repayment options that the Government makes available to you provides flexibility, makes repayment affordable, and allows you to change your payment plan at any given time.

Some of the most common repayment plans include the following:

  1. Standard Repayment Plan – Fixed payments ensuring your loans are paid off within 10 years.
  2. Graduated Repayment Plan – Payment amounts increase over time, and ensure your loans are paid off within 10 years.
  3. Extended Repayment Plan – Fixed or graduated payments, ensured to pay off within 25 years
  4. Income-Driven Plans – Monthly payments are 10-15% of your discretionary income, but never more than amount that would be paid under the Standard Repayment Plan.
  5. Income-Sensitive Plan – Monthly payment based on annual income; the loan will be paid in full within 15 years.

Upon graduating, leaving school, or dropping below half-time enrollment, you enter a “Grace Period”. The Grace Period is the time you receive (typically six months) to get situated financially and decide how you want to approach paying back your loans. The type of loan that you receive, the amount borrowed, the interest rates on the loan, and the type of repayment plan that you choose will determine the monthly amount that you must pay.

How should I handle paying off my student loan debt?

Do your research!

There is a lot involved in borrowing and repaying your student loans. Gather all the information regarding the type of loans you have, interest rates, and what type of repayment options are available for your specific loans. Choosing which loans to pay off first may be something to consider, especially if interest rates vary amongst each individual loan (higher vs. lower rates, fixed vs. variable rates).

Decide which repayment plan is right for you!

A shorter repayment plan, such as the Standard Repayment Plan, will allow you to pay off your loans in a shorter time period, along with minimizing the amount that you will pay in interest on your loans. At the same time, it will tie up more of your cash, leaving you with less on hand. A longer repayment plan, such as the Extended Repayment plan, will permit you to have lower monthly payments, which will free up more cash for you each month. At the same time, you can expect to pay more in interest.

Keep amortization in mind!

Amortization is an accounting technique that is used for paying off debt, by making periodic principal and interest payments through a specific amount of time (10 years, 25 years, etc.). Most of your monthly payments will go towards the interest on your loan in the early part of your repayment, and payments will begin to become more principal heavy in the latter part of repayment. Keep in mind that the amount of money you owe, along with the size of your monthly payment is critical in choosing which plan is best for you. Negative amortization relates to having such small monthly payments, that your payments don’t even cover the accruing interest on your loans, and therefore will cause the loans to grow more and force you to pay even more interest over time.

Understand your financial priorities!

As you prepare to start making monthly payments on your student loans, it is important that you have your financial priorities in order. Some would prefer to make big monthly payments and knock out their student loan debt as quickly as possible to get the debt burden off their back. Others may prefer to make minimum payments, accept that they will be paying a lot more in interest, and put their money towards other things, such as hobbies, investments, retirement, vacation, etc. This is a personal decision that you need to make, and one that you are comfortable with.