Loan Repayment and Debt
Know Your Options
Unlike grants or work-study aid, loans remain a part of your life long after college graduation. It's important for you to give some serious thought to how much debt you're willing to shoulder and to map out a plan to repay loans as easily as possible.
Understand Your Debt Limit
How much debt is too much debt? Experts suggest...
- Students: Some advisors suggest that monthly student loan repayments should not exceed 10–15 percent of a new grad's starting monthly income.
Use the Student Loan Calculator to estimate how much college and graduate/professional school debt you can reasonably manage in relation to your likely starting salary. - Parents: Some lenders advise parents to limit total debt repayments (including education loan repayments) to 37 percent of gross income.
Use the Parent Debt Calculator to estimate your parents' capacity to take on new debt. - The interest rate for a Stafford Loan is fixed at 6 percent and the rate for a Perkins Loan is 5 percent. PLUS loans are fixed at 8.5 percent.
- Students can deduct up to $2,500 per year of education loan interest payments for the life of the loan. Parents who take out loans to pay for their child's education expenses can claim the same deduction. Some limitations apply. Consult IRS form 970 for details.
Loan Repayment Options
Most lenders will allow borrowers to adjust repayment terms to suit individual needs and circumstances. Always factor in the total cost of the loan when considering a change to your repayment plan.
Standard Repayment
Most students repay their loans using a standard repayment plan. Standard repayment involves making equal monthly payments over a 10-year period.
Other Repayment Options
The Federal Direct Loan program and numerous private lenders also offer the following flexible repayment options:
- Extended repayment: Depending on the total amount of debt and which lender is involved, the borrower can extend the repayment period up to 30 years.
- Graduated repayment: Under this plan, payments gradually increase, usually every two years. Remember that your income will likely be increasing over time, too.
- Income-contingent repayment: This plan ties the repayment amount to income and often allows for a longer repayment period.
Be careful to balance long-term cost of these repayment plans against short-term payment relief. Although you will be paying less per month, you could end up owing (and paying) significantly more in the long run because you're slowing down your repayment of the principal.
Note: You should be able to switch back to a standard repayment option at any time. Once you are able, you should also consider increasing your monthly payments.
Repayment Tips
Don't forget to:
- Account for fees when you are considering education loans. Up to 4 percent of the total amount of a loan may be eaten up by up-front fees (3 percent to the lender, 1 percent to the guarantor) although many lenders and guaranty agencies discount these fees.
- Visit the aid office when you feel you are taking on more than you can afford. The financial aid staff will be able to advise you about reducing your level of borrowing and managing your current debt.
Loan Lingo
Here are some repayment terms you should know:
- Loan consolidation: Loan consolidation means combining outstanding loans into a single loan with one monthly payment. You will have more time to pay off debt, but the total cost will be higher.
- Deferment: This is a period during which payments are not required on a loan. For example, you can receive a deferment while enrolled in graduate school, serving in the military, the Peace Corps, or other public service programs.
- Forbearance: This provision allows you to temporarily stop loan payments because of financial hardship.
- Cancellation: Some programs allow borrowers to work off loans by teaching in low-income areas or areas with teacher shortages.
Repaying a PLUS Loan
PLUS loans are popular, non-need-based loans offered by the federal government to both parents of dependent students and to graduate students. Borrowers who qualify for PLUS loans are able to borrow up to the full cost of education, minus any financial aid.
Legislation recently passed allows parents to choose to:
- Defer payments or a PLUS loan until six months after the date the student ceases to be enrolled at least half time.
- Pay accruing interest monthly or quarterly, or allow interest to to be capitalized, i.e. added to principal, quarterly.
If you or your parents are thinking of taking out a PLUS to pay for your education, use our Parent Loan Repayment Calculator to estimate monthly payments based on repayment period, annual interest rate, and loan principal amounts.
