Taking out a loan to finance your education is an important decision that, if made responsibly, can ease the ever-rising cost of attending college. However, the management of your loans is just as important, if not more so, than the decision to borrow. Irresponsible management of loans can lead to major struggles down the road in borrowing money, purchasing a house, purchasing a car, getting a cellphone plan, and more. In order to avoid these problems and set yourself up for a successful loan repayment, you should have a solid knowledge of how the repayment process works.
What is the Difference Between Subsidized and Unsubsidized Loans?
- Students may have either a subsidized or an unsubsidized loan to help finance their education. A subsidized loan is federally guaranteed and is based on financial need. Under this type of loan, the federal government takes on the responsibility of paying the interest that accumulates while the student remains in school, as well as during their grace period and throughout any authorized deferments, or postponements.
- An unsubsidized loan is also federally guaranteed, but it is not based on financial need. Under this type of loan, interest will accumulate from the initial disbursement of the loan until the loan has been paid fully. Interest will also continue to accrue throughout the student’s grace period.
What is a Grace Period?
After a student graduates, drops to less than full time, or withdraws from college, there will be a one-time suspension period before your first payment is due on any ongoing Stafford loans. This period lasts 6 months, and occurs one time only.
How to Choose a Repayment Plan
There are many types of repayment plans available to choose from. Thus, it is important to choose a plan based on your own individual needs. You should choose a plan according to your financial goals, as well as your current/expected financial situation (i.e. how much you can afford to pay per month). You can differentiate between the various repayment plans according to the total cost of paying off the loan, including both principal and interest. You should also consider the monthly payment that each plan requires, as this is often the most important factor in choosing a plan.
Types of Repayment Plans
Loan repayment plans can be generally categorized according to time and income. These federal loan repayment programs each have various distinctions allowing you to choose a plan that fits within your budget constraint.
- Time-Driven Plans:
- Standard Repayment
- Graduated Repayment
- Extended Repayment
- Income-Driven Plans:
- Income-Based Repayment
- Pay As You Earn
- Revised Pay As You Earn
- Income-Contingent Repayment
- Income-Sensitive Repayment
Any educational loan, including both federal and private student loans, allow for penalty-free payment, meaning that you can reduce or even entirely pay off the balance of the loan at any time by making extra payments. This early payment allows you to reduce or eliminate the balance of your loan without paying any additional costs or fees. This option can make loan repayment less costly by reducing the total interest paid on the loan.
Failing to make a monthly loan payment as scheduled by your lender causes your loan to go into default. There are many severe repercussions for loan default, including wage garnishment, state and federal income tax refund offset, and litigation. It is important to contact your loan servicer immediately if you think there is a possibility of going into default, as there are options to stabilize your loan repayments and change your plan if necessary. If, however, you do default on your student loan, the balance (including principal, interest, and collection fees) typically becomes due immediately. Other payment options for defaulted federal student loans include loan rehabilitation or loan consolidation.
The Importance of Your Loan Servicer
Your loan servicer or lender is the company that handles the billing on your federal student loan. Your assigned servicer will be instrumental in the loan repayment process, collaborating with you on the various repayment plans and providing assistance in all aspects related to your loan. Communication with your service lender is key, as they need to be aware and up to date with any changes in your financial situation. If you believe that you may qualify for loan forgiveness, you may contact your loan servicer to check your eligibility. Examples of loan forgiveness programs include the Public Service Loan Forgiveness Program, which encourages individuals to work in full-time public service jobs. Those eligible for this program may have the remaining balance of their loans forgiven after having made 120 qualifying payments while employed by certain public service employers.
Paying back student loans may seem like a burdensome task; however, the process may be simplified with the right repayment plan and a general knowledge of the process. The way in which you handle your student loans could greatly impact your financial health, and a responsible management of your loans helps to make a great start to achieving your financial goals.