Student Loans Demystified Part 3: Student Loan Repayment Strategies

Repayment of your student loans can be a daunting task. However, repayment is achievable and many students successfully accomplish this task each year. The best-case scenario would mean that a student loan repayment strategy begins while a student is still in school. This blog post will provide 5 steps to establishing a repayment plan.

Step 1: Estimate the dollar amount of student loans you are on track to borrow while in school. To arrive at this estimate complete simple addition of how much you would have borrowed by the time you graduate if you were to continue to borrow at the same rate each semester.

With an estimate of how much you will borrow while in school you can utilize an online student loan calculator to get a rough estimated calculation on what your monthly repayment amount would be after graduation. To get a more accurate estimate we encourage students to meet with one of our financial coaches and build a projected repayment plan.

We encourage students to weigh this monthly payment amount against what there expected salary (in the career field they have chosen) and cost of living (in the city they would like to live in after school) will be upon graduation to determine whether the amount they are borrowing is an affordable amount.

Step 2: Start repayment of your student loans early. Students are able to begin making payments on their student loans prior to graduating to reduce the balance and get ahead. The steps for a student to make an online account with their loan servicer to make payments are outlined in part 1 of this blog series.

When you graduate or go below half-time as a student you are given a sixth month grace period before you are required to make your first payment. If a student has not already started making repayments we advise that students make payments during the grace period. It will allow the student to get ahead and reduce the monthly payment amount during the repayment period.

Step 3: If I am able to begin making payments early or I am to allocate additional dollars above my required monthly payment amount which of my student loans should I put the money towards? We suggest picking your student loan with the highest interest rate to allocate early or extra payments towards as this reduces the amount of interest that you will pay back over the duration of the loan and save you money

Step 4: Entering Repayment Phase. As mentioned previously six months after graduation or dropping below half-time payments will come due. It is most essential that you prepare ahead of time to make sure that your budget is prepared for the new monthly payment required. A common mistake the graduates make is adding too many fixed expenses to their budget in the six month grace period prior to their loans coming due. This then makes repayment difficult even when a graduate has begun a decent paying job. We strongly encourage students as soon as they land a job to create a space in their budget for their student loan payment.

Secondly, you must decide which repayment plan to choose. Access to the different repayment plan options that you have will be found either by logging into your student loan service account or speaking with a student loan servicer representative.

There a four repayment options that are most common. The standard repayment plans, graduated repayment plans, extended repayment plans and income-based repayment plans.

Standard Repayment Plan: Unless you request an alternative payment plan you usually will be enrolled in the standard repayment plan. This plan means that you will be expected to make a monthly payment for ten years. This means 120 equal payments to pay off your students loans. As with all of the payment plans you are able to make additional payments to reduce your loan balances and pay them off early. We advise students to utilize this payment plan if at all possible. This is because this particular plan will cost a student the least amount of compounded interest charges.

Extended Repayment Plans: These particular plans allow you to extend your payments out over 20 to 25 years. This plan means that your monthly payment will be a reduced payment. It will be either 240 or 300 monthly payments. This repayment plan is kinder on the monthly budget but will cost much more money through more interest compounding over the duration of the loan

Graduated Repayment Plans: These particular plans start with monthly payments that are lower at first and then increase over a ten year period. The payments towards the end of the ten years will a much larger sum. In some instances this plan can expand beyond ten years. Once again this plan is friendlier to a monthly budget at the beginning. If you opt to use this plan it will cost more money over time than the standard repayment plan due to more interest accruing at the beginning portion of the repayment plan.

Income-Based Repayment Plan: There are a number of different forms of this plan. All of the plans of this nature determine your monthly payment amount based off a percentage of your income to ensure to that the payment is affordable. This payment plan takes anywhere from 15 to 25 years of monthly payments to complete. As with all of the plans mentioned except the standard repayment plan choosing this plan will mean additional money will be paid in interest. If you are eligible for the public service loan forgiveness program one of these payment plans may be good for you.

Step 5: Begin making payments! You can do it. Don’t lose hope. Remember, the more proactive you are on the front end with planning and attempting to minimize borrowing while in school the more money you will save! Here is one final tip to save you money. If you schedule an automatic electric monthly payment from your checking or savings account, you receive a 0.25% interest rate deduction on Federal Direct Loans.

We are here to help. If you would like assistance building a plan to minimize student loan debt and repay your student loans the WKU Center for Financial Success is ready to help. Click here to schedule a free financial coaching session today!

If you haven’t had a chance to read the previous posts in the Student Loans Demystified series catch up here:

Student Loans Demystified Part 1: Where do I start?

Student Loans Demystified Part 2: Terminology Simplified

Student Loans Demystified Part 2: Terminology Simplified

It can be difficult enough to know where to start as discussed in part 1. However, once you get started you then are faced with student loan terminology that can almost feel like a foreign language. The good news is that it can be understood and this blog post will help you as you work to become literate in student loan terminology.

Terminology is important because it can cost you extra money or save you money. Terminology included in this post will include interest rates, direct subsidized loans, direct unsubsidized loans, direct parent plus loans, forbearance, deferment, default, repayment plan.

There is not an exciting way to describe these terms. However, it is critical to understand these concepts to successfully manage repay your student loans and save as much money as possible.

Interest Rates

A student loan interest rate is the amount the student loan lender charges for the amount of money borrowed. Interest is repaid over the duration of a loan.

Direct Subsidized Loans vs Direct Unsubsidized Loans

There are two kinds of loans typically borrowed by undergraduate students. 1) Direct subsidized loans and 2) Direct unsubsidized loans. These are the most common loans borrowed by students

  
Type of loanSubsidized LoansUnsubsidized Loans
Eligibility for LoanFor a student to be eligible to borrow a subsidized loan they must demonstrate financial need. This is determined by the fafsa application.Unsubsidized loans are available to all students regardless of financial need.  
Interest AccrualThe Federal government will pay the interest of subsidized loans while you are in school at least half-time.The interest from unsubsidized loans begins to accrue immediately upon borrowing.
Borrowing OrderIf you are eligible for subsidized loans we suggest utilizing this loan firstWe suggest utilizing this loan if you are not eligible for a subsidized loan or have used the entire amount of subsidized loans available to you.
For any given year the interest rate for undergraduate direct subsidized loans and unsubsidized loans is the same percentage. Repayment begins six months after graduation or when you drop below half-time in school.

Direct Parent Plus Loans

A parent plus loan is another form of debt used to pay for the cost of attendance at universities. Parent plus loans differ from direct subsidized and unsubsidized loans in a few ways.

  • The borrower of a parent plus loan is not the student. The borrower is the student’s parent or guardian.
  • The interest rate for this form of debt is much higher than regular subsidized and unsubsidized loans. This means Parent Plus Loans cost will much more money over the duration of a loan.
  • Loans payments are due immediately for Parent Plus Loans, however, deferment of payment can be requested until the student graduates.
  • Interest will begin to accrue immediately, even if payments are deferred.

We caution students to be slow to fund their education by utilizing parent plus loans. There two reasons why we suggest this.

  • First, parent plus loans make paying for college more of a family ordeal at a level that needs to be recognized to avoid future strife. Prior to borrowing this form of debt, a conversation needs to occur with the family member borrowing the parent plus loan in their name. This conversation needs to clearly define what expectations the family member has of the student in regard to assistance in repaying the loan. Some family situations may require that the student solely be responsible for repayment and other families may commit to assist with repayment. If the student’s family member commits to assist with repayment we tend to advise that the student ensures that this decision is not going to have a significant negative impact on the family member’s finances.
  • Second, if a student is having to resort to parent plus loans it means they have already borrowed the maximum amount possible from direct subsidized and unsubsidized loans. This amount of borrowing can create a financially dangerous debt burden that the student will have to pay back upon graduating. This can be especially true if the student’s agreement with their family member is that the expectation is that the student will be expected to pay back the parent plus loan instead of the family member.
  • We strongly advise students that are utilizing parent plus loans to fund their education to schedule an appointment with a CFS Financial Coach. The point of the meeting is to help ensure that a student using parent plus loans are positioned to be able to pay them off after graduation or find other less expensive ways to fund their education.

Repayment Terms

Deferment is when your student loan payments are postponed. Typically, direct subsidized loans and unsubsidized loans are deferred until after sixth months of graduation or when a student drops below half-time in school. This term is used most often for a student loan when the student is still in school.

Forbearance is when payments are temporarily suspended typically due to financial hardship leading to the borrower being unable to make payments. This term is more often used when the student loans are in the repayment phase. In most instances, interest will still accrue during a time of forbearance. If you are in a position where you are not able to make a payment on time make sure you call your student loan servicer and communicate the financial hardship you are experiencing.

Repayment Plans is a straight forward term. Your student loan servicer will provide multiple plan options to repay your student loans. This will include a standard repayment plan, extended repayment plans, graduated and income-based repayment plans. Repayment will be discussed in more depth in part 3.

If you have questions and would like to speak to a trained financial coach about your student loans please visit the WKU Center for Financial Success website and request an appointment at this link https://www.wku.edu/cfs/become-a-client.php.

If you missed part 1 of this series: Where do I start? You can catch up here.