Loan Payment Factors
You should become very familiar with the numbers associated with your loan, because they directly affect both your monthly payments as well as what you’ll pay over the life of the loan. These three figures matter most:
- Principal: Amount of money borrowed from a lender.
- Loan Term or Length of Loan: Amount of time it takes to pay off. Varies by type of loan and repayment plan.
- Interest Rates: Percentage rate charged by lenders for letting you use their funds. Varies by loan type:
Fixed-Interest: The percentage rate and your monthly payments stay the same
Variable-Interest: The interest rate, along with your monthly payment, can go up or down.
Interest rates on federal student loans are fixed, and all borrowers get the same rate. Interest rates on private student loans differ by loan type and borrower’s eligibility (credit history and other factors). Higher interest rates result in higher monthly payments and overall more money repaid over the length of the loan.
- Fees: Additional charges for processing and other factors are a percentage of the total loan amount and range from one to four percent, depending on the loan type. Fees are deducted from each loan disbursement received, meaning your actual payout will be less than the amount borrowed. You’re still responsible for repaying the entire borrowed amount.
When Interest Begins on Student Loans
Both the federal government and private lenders begin charging interest on loans as soon as they release the funds. Whether or not you have to pay this interest—or how soon you have to pay it—depends on the type of loan. Here are examples:
- Subsidized federal loan: With this loan, the U.S. Department of Education (DOE) pays the interest charges on the loan as long as a student attends college at least part-time. The agency will continue to pay the loan interest during a six-month grace period after a student graduates or leaves school. Should a student need to defer payments due to financial troubles, the DOE will make those interest payments as well.
- Unsubsidized federal loan: Students have the option to pay the monthly interest while attending school, during the six-month post-graduation grace period and during a deferment. If a student chooses not to pay the interest during these times, the lender adds the accumulated interest charges to the loan principal.
- Private student loan: Most private loans require a borrower to start making payments, including interest, as soon as the lender releases the money. Some lenders offer the option to defer loan payments while a student attends school or make limited payments while in school to reduce the overall cost of borrowing. Interest accumulates during this period of deferment and is added to the loan principal.
Prior to graduation, work with your lender to determine a repayment plan that is best for you. Repayment plans vary, based on the type of loan.
Here is what you should know about each federal loan repayment plan:
- Standard: Payments are a fixed amount that is at least $50 per month. This repayment plan can last up to 10 years, and you’ll pay less interest on your loan under this plan than you would on others.
- Extended: This repayment plan is similar to the standard plan, but it has a longer time period (12 to 30 years). While the extended term lowers the amount of each monthly payment, it increases the overall interest paid on the loan because you’ll be paying for a longer period of time.
- Graduated: This plan begins with lower payments that gradually increase every 2 years over the life of the loan (12 to 30 years). Monthly payments can be no less than 50% and no more than 150% of the monthly payment under standard repayment. For example, if your standard payment would be $250, under the graduated plan, your payment can range from $125 to $375 over time.
- Income-contingent (Direct Loans only): Payments under this plan are based on your income, family size and total debt. Payments are adjusted each year as your income changes. After 25 years of payments, the remaining balance is forgiven. The balance that is written off is taxable under current law.
- Income-sensitive (FFEL only, except PLUS loans): Similar to the income-contingent plan, this plan from the Federal Family Education Loan (FFEL) program calculates your monthly payments as a percentage of monthly income. This percentage can range from 4% to 25% and is determined by the borrower. Income-sensitive repayment is limited to a 10-year repayment term, but you must reapply for income-sensitive repayment each year.
- Income-based (FFEL only, except PLUS loans): To qualify for this plan, you must have partial financial hardship. It’s similar to the income-contingent plan, but your maximum monthly payments are 15% of your discretionary income. After 25 years of payments, this loan also has the taxable balance written off.
A smart way to make sure you never miss a payment and aren’t late paying your student loan is to set up monthly automatic payments. There are several ways to do this. You can schedule a recurring electronic debit by providing your lender with your bank routing and account information, and your lender will withdraw the funds monthly from your checking account. You may be able to provide your lender with a credit card, so you can charge your monthly payments to your card while simultaneously accumulating cash back, travel and other perks. Or, you can set up a recurring payment to your lender through the online bill pay service your bank or credit union offers.
You can make payments before they’re due or pay more than the amount due each month. To pay off your loan faster, make sure your lender or loan servicer knows the extra funds shouldn’t be applied to future payments. You can cancel automatic payments or change the payment amount or payment date by contacting your lender or by editing your scheduled bill payment request online.
When you set up automatic payments, it’s important to make sure you have the funds in your account each month to cover the withdrawal on the payment date. Otherwise, you could overdraw your account and incur overdraft and late payment fees. If you’re paying with your credit card, make sure to pay off your balance each month to avoid interest charges on top of the interest you’re paying on your loan.
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