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Step 5: Run the Numbers Before Choosing a Repayment Option or Consolidating your Student Loans

Step 1: Know what you borrowed, from whom you borrowed, and who services the loans.

Step 2: Know the "relative cost" of your student loans.

Step 3: Know your grace periods, deferment options, and forbearance options.

Step 4: Know your "decision points" and keep a calendar.

Step 5: Run the numbers before choosing a repayment option or consolidating your student loans.

Step 6: Commit to keeping good records.

Step 7: Keep a budget and know when you need the help of a financial professional.

Step 8: Know and use your support systems.

Once you have exhausted any grace, deferment, and forbearance options you have available you should be given a number of repayment options by your loan servicer. Be sure you know both your (a) monthly payment amount and (b) estimated total repayment amount for any repayment option you choose, especially if you consolidate your loans.

More than ever before, borrowers have a variety of options to help them with repayment. This may be one reason medical school graduates have extremely low default rates. This section will attempt to familiarize you with the repayment options currently available for borrowers through various loan programs. Please remember that as with most everything else in student financial aid, the repayment options are subject to change. It is very important to keep in close contact with the servicer(s) of your student loans regarding repayment options.

Knowing the various repayment options available for each loan program is part of sound debt management. One purpose of this section is to ensure that borrowers know what questions to ask their loan servicer when choosing a repayment option to best suit the borrower's particular needs. The repayment options and a brief description of each follows.

Standard (Level) Repayment:

ten (10) years, level or fixed payments
higher monthly loan payments, lower overall repayment costs compared with other repayment options
available for most loan programs, including Stafford, Grad PLUS, Perkins, PCL, LDS, many institutional loans, and private loans
in general, except for private loans, this option will be given to you by your loan servicer if you do not select a repayment plan when given the opportunity

Graduated Repayment:

payments start low and increase over time at designated amounts at designated periods of time (the amount of increase and when the increases take place depends on your loan servicer)
this option may help if you have cash flow concerns when you first enter repayment, but the cash flow concerns are not long term
more expensive in the long run than Standard (Level) Repayment because of the lower initial payments
usually 10 years for Stafford Loans, up to 30 years for Consolidation Loans

Income-Based Repayment

borrower must demonstrate a "partial financial hardship"
monthly payments capped at 15% of discretionary income
monthly payment adjusted annually according to changes in income and family size
maximum 25 year repayment
government pays unpaid interest on Subsidized Stafford loans for up to 3 consecutive years from initial entry into IBR if monthly payment does not cover monthly interest that accrues

Income-Sensitive Repayment (FFELP only):

payments tied to income, adjusted annually based on expected total monthly gross income from all sources
available for Stafford, Grad PLUS and Consolidation Loans
25 year repayment

Income-Contingent Repayment (DL only):

payments tied to income, adjusted annually based on expected total household income and debt
available for Stafford and Consolidation
25 year repayment

Extended Repayment:

are extended up to 25 years maximum
currently available for FFELP, DL and private loans
available for FFELP or DL borrowers who accumulate $30,000 or more in Stafford loans beginning on or after October 7, 1998
this can be a very expensive way to repay student loans and in most cases, should only be used if there are cash flow problems or concerns which are likely to last more than a few years
borrowers selecting extended repayment may want to try to pay down their loans early once their cash flow needs have been met

Early Repayment

There is never a penalty for paying down a student loan early. However, please note, payments on federal student loans are applied in the following sequence:

collection costs and related fees first,
accrued and unpaid interest, then
principal.

Remember to inquire about borrower benefits on repayment options. Servicers, on behalf of the lender, offer what are referred to as borrower benefits or repayment incentives, which amount to discounts if you pay your loans on time, although not offered on all programs. For example, one reward program discounts your interest rate after 48 straight payments, while one reimburses borrowers for some of their loan fees after making 24 straight payments. Another program gives you an interest rate break if you pay from an automatic debit from your account, as opposed to paying by check. Be sure to ask your loan servicer if you have access to these programs.

One final, but very important item regarding repayment of your student loans. Student borrowers may be able to take a tax deduction for interest payments on their student loans. According to the Taxpayer Relief Act of 1997, students who have exhausted their grace and deferment options and have actually started repaying their student loans, can deduct interest payments made on those loans on their tax returns, regardless of whether or not they itemize deductions. Read more about Education Tax Incentives.