Loan Repayment and Debt
Deciding to go to college and investing in your future is a good idea. However, paying for it requires some planning. In many cases, this includes taking out loans.
Unlike grants or work-study aid, loans remain a part of your life long after college graduation. Give some serious thought to how much debt you're willing to shoulder, and map out a loan repayment plan.
Use our Student Loan Calculator to determine your monthly payments and compare them to your expected starting salary.
Understand Your Debt Limit
How much debt is too much debt? Experts suggest these guidelines:
- Students: Some advisers say that monthly student loan repayments should not exceed 10–15 percent of a new graduate's starting monthly income.
Use the Student Loan Calculator to estimate how much college and graduate or 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.
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 Publication 970, Tax Benefits for Education for details.
Loan Repayment Options
Most lenders 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 offers 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 25 years.
- Graduated repayment: Under this plan, payments gradually increase, usually every two years. Remember that your income is likely to increase over time, too.
- Income-based repayment: This plan ties the repayment amount to income and often allows for a longer repayment period.
Be careful to balance the long-term cost of these repayment plans against short-term payment relief. Although you are paying less per month, you could end up owing (and paying) a lot more in the long run because you're slowing down your repayment of the principal.
You should be able to switch back to a standard repayment option at any time. Once you are able to, you should also consider increasing your monthly payments.
Repayment Tips
Remember to:
- Account for fees when you are considering education loans.
- Visit the financial aid office if you feel you are taking on more than you can afford. The financial aid staff members can advise you about reducing your level of borrowing and managing your current debt.
Loan Terminology
Here are some repayment terms you should know:
- Loan consolidation: This means combining outstanding loans into a single loan with one monthly payment. You have more time to pay off debt, but the total cost is 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 or 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: In this case, the borrower is released from the debt, without having to pay it. Some government programs allow borrowers to cancel all or part of their 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 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. The borrower can choose to:
- Defer payments on 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 be capitalized (added to the principal) quarterly.
Use our Parent Loan Repayment Calculator to estimate monthly payments based on repayment period, annual interest rate and loan principal amounts.
This information is general in nature and should not be construed as tax or financial advice. Consult your tax adviser or financial planner for more complete information.
