Weighing Your Student Loan Repayment Options

Graduation season is upon us. And that most likely means a student loan bill is not far behind. It can be overwhelming to receive that first bill, especially if you don’t have steady employment in place. Speak up as soon as you think you’re heading for trouble. “Before you give up and stop paying your loans, learn what options are available. If you default, you lose options,” says Mark Kantrowitz, publisher of Fastweb.com and FinAid.org.

Here are some of your options:

  • Deferment or forbearance. This option temporarily allows you to stop making payments and might be suitable for short-term financial difficulty. If you’re dealing with a long-term financial difficulty, Kantrowitz suggests increasing the term of the loan, which reduces monthly payments.
  • Extended repayment increases the term of the loan, based on the amount owed. An increase in the term reduces the monthly payment. The only drawback is you’ll pay more interest over the life of the loan.
  • Graduated repayment starts with a low monthly payment based on your income and gradually increases every two years.
  • Income-based repayment bases monthly payments on a percentage of your discretionary income as opposed to the amount you owe. (Discretionary income is the amount by which your adjusted gross income exceeds 150% of the poverty line.)
  • Pay as you earn is a form of income-based repayment. The difference between the two is income-based repayment is 15% of discretionary income and pay as you earn is 10%. After 25 years for income-based repayment or 20 years for pay as you earn, any remaining amount will be forgiven. However, the forgiven amount will be taxable.