Understanding Student Loan PaymentsFebruary 22, 2019
There are many options when it comes to paying student loans, and just as many questions! Questions like what these terms and situations can mean for a borrower. If you have questions about your student loans or want to learn more about how you can manage your repayment, check out these tips on understanding student loan payments.
What is a student loan servicer?
Your student loan servicer is the company collects your payments. According to Consumer Financial Protection Bureau, they typically handle most administrative task associated with your loan. Servicers do things like, answer customer service questions and enforce regulations provided by your lender related to your loan. You pay them for your loan and they give you options for repayment and deferment. It’s likely you’ll take out a student loan with one company and end up getting a different servicer. Your servicers can change too if your loan is transferred. If you choose to consolidate or refinance with a company that gives you lower payments, better interest, or quicker payoff you’ll probably receive a different servicer.
When should you start making payments?
Start making loan payments whenever you can. Most student loans allow a period of non-payment while you are in school, known as a grace period. On average most student loan lenders require payments to be made when the borrower is at less than half-time status for six months. You don’t have to wait until six months after graduating to make payments, though! If you can make student loan payments while in school, you will save on interest and cut the time it takes you to pay off your student loans.
What’s a student loan grace period?
The grace period is typically a 6 month period that occurs after graduating, dropping below half-time enrollment status, or leaving school. During the grace period, you are not required to make payments on your student loans. Grace periods will vary based on the student loan lender that you have. Know what your grace period is so you aren’t caught off guard with late payments.
Can I pay extra on my student loans?
Yes! There are no prepayment penalties for federal or private student loans. Prepayment penalties are fees charged for reducing your loan balance or paying the entire loan off early. Many other types of debt like mortgages can have a prepayment penalty. Prepayment penalties were created to limit early payment of a debt, but no need to worry about that with your student loans. Instead, pay attention to how additional payments are applied to your loan.
If you make payments online some loan servicers allow you either pay extra on the principal or apply the additional toward interest on the next payment. Basically, if you choose to pay over the minimum depending on who your lender is, you may need to specify the amount that is a prepayment. Prepayments on your loans go towards the principal balance. You should aim to make prepayments sometimes referred to as overpayments because it lowers the total amount of the loan. When the principal balance decreases it reduces the amount of interest you’ll pay in the long term. The next monthly payment will usually remain the same. Since you’re not applying additional money toward your next payment if you choose this option.
Not all loan servicers will direct prepayments towards the principal of your loan unless specified by the borrower. Some lenders will count the prepayment as a payment towards your next monthly payment. That can make it seem like your extra payments are hardly affecting your balances at all.
Instead, try to direct additional payments toward one loan’s principal. For example, if you have several loans through the same servicer, but one is $1,000, you can pay that off within a year. If you pay an extra $100 per month on that one $1,000 loan principal- it will be gone faster! If you’re not allocating prepayments strategically, you won’t see this same kind of progress.
What if I can’t pay my student loans?
There are limited options available when you can’t pay student loans. Weigh your options carefully. When making student loan decisions make sure you’re not adding stress to your future. First, contact your servicer immediately. You’ll have more flexibility if you stay on top of repayment before you start making late payments or missing payments. Avoid missing or late payments at all costs! Not only will late or missed payments damage your credit they put you at risk for extra fees. In addition to damaging your credit, risking additional fees, you could lose benefits available to only those who pay on time.
Repayment Options (Not a Long Term Solution)
Look at repayment options. If you can’t pay with the plan you’re currently on there may be a better repayment option. If you are able to select another repayment option that lowers your payment you will want to consider doing so temporarily. Doing this quickly will avoid you being late on future payments. It’s important to note that repayment plans are not a long-term solution to paying back student loan debt. We wouldn’t recommend for the long term because in more income contingent repayment plans the monthly payment isn’t covering the interest that is accruing during that period. Therefore, you can make a payment every month but the overall loan balance remains the same or could even increase!
Consolidating Student Loans
If you’re in good standing on your loans, but want to reduce your payments student loan consolidation might be a good idea. Consolidation can make it easier for you to manage paying all of your loans, open you up to other repayment options, and reduce fees. It’s not a sure thing, but it doesn’t hurt to investigate this option and see if it is right for you. Learn about the difference between student loan consolidation vs. refinancing.
Deferment or Forbearance: Use with caution!
The last options to consider are deferment or forbearance. If you can avoid these options like changing repayment or consolidating, do it! Usually, borrowers have to be in financial hardship to qualify for deferment or forbearance. That doesn’t mean you’re off the hook because you’re in a tough financial spot. Depending on the loan you have, your interest might be added to the principal balance. This is really not ideal because it means your balances will grow. When you start paying again, your balances will be higher than where they are today. This is called capitalized interest—it equates to paying “interest on interest” and can get out of control fast if you use deferment or forbearance for longer-term hardship.
Most people don’t qualify for loan forgiveness because they are having a hard time paying their loans, but be aware that is possible. If you have developed a disability that precludes you from using your education or went to a school that has since shut down you might be eligible for forgiveness. Don’t count on this as an option, and don’t delay if you can’t pay your loans. Start investigating what’s available to you as soon as possible.
What are income-based repayment options for student loans?
Private loans may have options available that will lower your payments if you have a lower income, but the standard income-driven repayment plans apply to federal loans. Your monthly loan payment is calculated on your income. Your income is based on some stipulations and it may be taken into account things like your family size.
The standard income-based repayment plan adjusts your payment if your loan payments are more than 10% of your discretionary income. Based on when you took out your loans, there may be other benefits or stipulations to meet in order to qualify. Regardless, you’ll have to calculate your loan payments based on your income and family size through your servicer.
This type of repayment limits payments to 20% of discretionary income. The income will be based on income and family size. It is the only option available to Parent PLUS loan borrowers and requires PLUS borrowers to consolidate their loans to qualify.
Pay As You Earn and Revised Pay As You Earn
There are limits on which form of this repayment plan you can qualify for. These qualifications are based on when you took out your loans. On the Pay, As You Earn plan you’ll have payments that correlate to 10% of discretionary income. The payment will be based on how much money you’re making and limiting the term of the loan to 20–25 years depending on whether you were a graduate or undergraduate borrower.
How does refinancing change my student loan payments and payback?
Refinancing opens you up to lots of different options. Some qualifications to refinance include illustrating a responsible credit history. People often look into refinancing when interest rates are high, they have a steady income and good credit. Refinancing could help borrowers qualify for lower interest rates. Sometimes people refinance in order to get new loan terms and pay off their loans sooner. Shortening the loan terms on your loan can help you to pay less interest over the life of the loan. Borrowers will refinance to a longer term that allows them to continue the loan payments for a similar or longer period of time.
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