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Payback Time: Keep Up With Your Student Loans

Borrowing money for school also means paying it back — with interest. Different loan programs have different repayment schedules. Make sure you know all the facts about your loan repayment plan to avoid default and smooth your financial future.

When Do You Have to Repay?

Depending on the loan, you may not pay until you’re out of school. In addition, there are different policies regarding interest payments. Check out your loan plan to see what rules apply:

* Direct or Federal Family Education (FFEL) Student Loans

o Whether your loan is subsidized or unsubsidized, you start paying back after a six-month grace period from the day you leave school (whether you graduate or drop out) or drop below half-time enrollment.

o If you have a subsidized loan, then you don’t pay any interest until that time, either. But if you have an

unsubsidized loan, you can choose to pay the interest, or let it accrue (add up) while you’re in school.

* Perkins Loan

Payments start nine months after you leave school or drop below half-time status.

* PLUS Loan

Parents must begin repaying within 60 days after the last disbursement of the loan, which means if the last semester of school starts in January, they will start repaying sometime in March.

Repayment Plans

There are five ways you can repay your loans. Each option offers varying degrees of flexibility, depending on the amount you borrowed and the type of loan.

Standard or Level Repayment Plan

* Payments: A set amount of money (usually at least $50) every month for a fixed period of time up to 10 years.

* Advantages: Economical; keeps interest to a minimum.

* Disadvantages: If you borrowed a lot of money, your monthly payment will be large.

Extended Repayment Plan

* Payment: A set amount of money (usually at least $50) and an extended repayment period (between 12 and 30 years).

* Advantages: Good if you’re cash constrained.

* Disadvantages: Increases the amount you pay in interest.

Graduated Repayment Plan

* Payment: Start by repaying a small amount and increase it every two years until you’re done, which can vary between 12 and 30 years.

* Advantages: As with the Extended plan, this can make monthly payments easier to manage, because they are lower than a standard plan.

* Disadvantage: You will pay more in interest over the life of the loan.

Income Contingent Plan

* Payment: Calculated according to a percentage of your income (usually 4%) and the total amount of loans borrowed. As your income falls or rises each year, your monthly payments are adjusted accordingly. For this plan, you must sign a form that permits the Internal Revenue Service to inform the U.S. Department of Education of your income.

* Advantages: You usually have up to 25 years to repay with this plan.

* Disadvantages: Whatever you haven’t paid back after 25 years is taxed.

Loan Consolidation Plan

* Payment: Combine your student and/or parent loans into one loan with one monthly fee. Your new interest rate is the average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25 percent.

* Advantages: More flexible payment options; simpler payment process. Also, your monthly payment is often reduced because the term of the loan is usually extended.

* Disadvantages: This will probably increase the total amount of interest you pay.

You can opt to prepay any or all of your loan, generally without penalty. If you send a higher monthly payment, the ‘extra’ money will usually go first to any charges or fees, then to interest, then to the principal. Ask your loan officer if any stipulations, restrictions and penalties apply if you pre-pay.

Student loans can make your education possible, but you need to keep pace with your payments to keep your financial future on track. Know all your options to make sure your student loan payments stay in the black.