Once you leave school, things start moving pretty fast. It’s important to get acquainted with your federal loans during your grace period (the six months after you leave school). Once that grace period is over, it’s time to start paying your federal loans back.
Whether you have subsidized or unsubsidized federal loans will affect the amount you owe once you enter repayment.
With subsidized loans, your loans don’t start accruing interest until after your grace period.
On the other hand, unsubsidized loans start accruing interest as soon as the loan is disbursed. This means you will already owe more than you originally borrowed when you start paying the loan back after the grace period.
It’s also very important to understand capitalized interest. This takes place on your federal loans once a year. All of the interest charges from the prior year are added to the principle amount you owe on the loan. This includes any loan deferment or forbearance periods as well.
And, since interest charges are calculated on the principle amount, the amount you owe (and the amount you pay) go up.
If you’ve heard stories about students borrowing say $5,000, and ending up owing $12,000, this is how it happens.
You can avoid capitalized interest (which increases your loan amount) by at least paying off your interest charges on any federal student loans each year.
Knowing more about the student loan repayment process can help you know your options and successfully repay your student loan debt.
Before you leave school
Step 1 – Locate your loans
You can find a complete list of your federal student loans, loan servicers, and their contact information by logging in to the U.S. Department of Education’s office of Federal Student Aid website. Use your Federal Student Aid (FSA) ID—the same ID you used to complete the FAFSA—to log in.
Step 2 – Get to know your loans and your loan servicer
If you took out several loans, they may have different payment terms. Make a special note of the terms, including due dates, payment period, interest rates, monthly amounts, and other details.
Also, whenever there’s a change in your personal situation, let your loan servicer know.
Specifically, tell your loan holder if your name, address, or phone number changes.
Additionally, and importantly, tell your loan servicer if you believe you’ll have difficulty making your loan payment. They can work with you in advance.
Step 3 – Develop a repayment strategy
You can estimate your monthly student loan payments, including principal and interest, using this handy Student Loan Payment Calculator. You can also visit the U.S. Department of Education’s Repayment Estimator to compare repayment options.
Did you know there are several repayment plans available? Consider your options and find the one that works best for your situation.
Managing your student loan debt
There are lots of ways to pay back your student loans. Federal and private student loans come with different repayment options.
For any private loans you have, contact your loan holder to see what repayment options are available to you.
The repayment options for federal loans are discussed below. Your loan servicer can help you select the best option.
Standard Repayment Plan
You pay the same amount each month for 10 years.
Graduated Repayment Plan
You make lower payments now; larger payments later. Watch out for added interest charges.
Extended Repayment Plan
This is only an option if you owe $30,000 or more. Extends your repayment term to 25 years. Again, watch out for added interest charges.
Income-driven Repayment Plans
There are several options that help you stay in repayment even when you’re not making much money. Eligibility requirements and repayment terms vary so work with your loan servicer.
This is based on 10% of discretionary income with terms up to 20 years and includes loan forgiveness options. You must have the required proof of financial hardship to qualify.
This option is based on discretionary income and has loan forgiveness options. Repayment terms go up to 25 years. This option is only available for FDLP (Direct) loans.
Pay As You Earn (PAYE)
This option is based on 10% of discretionary income; your payments increase as you earn more money. Repayment terms of up to 20 years are available with loan forgiveness options. This is only available for FDLP (Direct) loans and you must have the required proof of financial hardship to qualify.
Revised Pay As You Earn (REPAYE)
This option is also based on 10% of discretionary income; your payments increase as you earn more money. Repayment terms of up to 25 years are available with loan forgiveness options. This is only available for FDLP (Direct) loans and you must have a partial financial hardship to qualify.
This option is based on your annual income. Repayment terms of up to 15 years are available. This option is only available for students with FFELP loans.
Choosing the right plan can help you pay back your loans on time, which means you pay less and get out of debt more quickly.
Work with your loan servicer to manage your loans. Keep a consistent dialogue going with them, and it can pay off, literally.
Watch out for scams
While you’re paying back your student loans, you may receive offers for loan relief, or even loan forgiveness. These offers may sound enticing, but be careful—they could be scams.
Scammers think students and recent grads are naïve enough to fall for their tricks. However, you can avoid their schemes by learning more about the common scams pulled on students.
One of the most important things you can do to avoid student loan scams is to stay in contact with your loan servicers. If you receive offers for relief that you’re unsure about, email or call your servicers to verify them.
If you think you’ve spotted a scam, you can report it to the Federal Trade Commission (or FTC) using their easy online complaint assistant. You can also call your state and local attorney general’s office to file a report.