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Student Loan Repayment for Dummies

Learn student loan basics including how to: make payments, get forgiveness, and manage interest.

Written By: Michael P. Lux, Esq.

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To many beginners and recent graduates, student loan repayment is both confusing and intimidating. As a result, getting started causes stress. The idea behind Student Loan Repayment for Dummies is to cover the basics in a simple and easy-to-understand manner.

We will cover the terms to know and the essential concepts to understand. After this short read, borrowers will understand the big picture and how to get started.

The Two Types of Student Loans

Before discussing student loan basics, repayment plans, or forgiveness programs, it is essential to talk about federal and private loans.

The government issues federal student loans. Congress and the Department of Education set the rules for federal loans. These loans come with excellent borrower protections and perks. However, the exact terms and conditions sometimes cause confusion, as they come from a government bureaucracy. Students get federal student loans by completing the FAFSA. To determine if your loans are federal and how much you owe, use this guide to tracking down federal student debt.

Banks and other financial institutions typically issue private student loans. The loan contract signed by the borrower contains the terms and conditions of the loan. A cosigner is often required for students to get a private loan. Cosigners are legally responsible for the debt if the borrower fails to make the required payments.

Most borrowers try to pay off their private student loans first. This is because federal student loans come with valuable borrower protections and are usually considered less risky.

Interest Rates and Payments

One of the most important terms on any student loan is the interest rate. Think of the interest rate as the cost of borrowing money.

Lenders make money by charging interest. The interest rate is normally listed as a percentage. For example, if you had a $200 loan with a 6% interest rate, that loan would charge $12 per year in interest. ($200 x .06 = $12)

Student loans generate interest daily. However, most lenders typically bill interest charges once a month. To see how this accounting works in more detail, check out this article on student loan interest.

Borrowers may see the interest rate on their student loans go up or down. Variable-rate loans go up or down according to the terms of the loan contract. Fixed-rate loans remain the same for the life of the student loan.

The principal balance is the amount a borrower currently owes. When you first borrow a loan, the principal balance is the amount borrowed. As you make payments, the principal balance gets lower. If you don’t make payments on the loan, interest may get added to the principal balance. At graduation, most borrowers have principal balances larger than what they originally borrowed. This is because the loan charged interest during school.

When a borrower makes a payment, the entire amount does not always count towards the principal. When a monthly payment is processed, lenders first use the payment towards any fees or interest charged to the loan over the previous month. The remaining portion of the payment lowers the principal balance.

Student Loan Repayment Plans

Borrowers make monthly payments according to their repayment plan. Most repayment plans are designed so that a loan is paid in full after a set term of years. For example, a 10-year loan means that the payments are calculated so that the loan is paid off in full after ten years. However, it is essential to note that the monthly payment is the minimum monthly payment. Borrowers are permitted to make larger payments to pay off their student loans faster.

Repayment plan options on a private student loan depend on the loan contract. Some lenders and loan contracts provide borrowers some options for repayment, but most private loan borrowers have limited repayment plan choices.

There are many different repayment plans for federal student loan borrowers. The standard repayment plan usually calculates payments so that the borrower pays off their loan after ten years. The standard repayment plan is also the default repayment plan, meaning that when you get your first student loan bill, it will be based on the standard repayment plan. Because the standard repayment plan usually has the highest monthly payments, many borrowers get very concerned when they see their first student loan bill. Fortunately, many other federal repayment plan options result in lower monthly payments.

Federal borrowers can select Income-Driven Repayment (IDR) plans. The primary benefit of the IDR plans is that borrowers make payments based upon what they can afford rather than what they owe. Borrowers who are unemployed or living near the poverty level can qualify for $0 per month payments. Borrowers can estimate monthly payments on the various IDR plans using the Department of Education’s Loan Simulator.

Where Do Student Loan Payments Go?

It is crucial for borrowers to understand the difference between a loan servicer and a lender.

The lender provided the student loan funds. For private student loans, the lender is usually a bank. For federal student loans, the lender is the federal government.

The servicer is the company responsible for collecting payments and interacting with borrowers. For federal student loans, borrowers make payments to the loan servicer. The loan servicer is also responsible for answering borrower questions. Private student loans are sometimes serviced by the lender, but they may be serviced by another company.

Student loan servicers and lenders may change. This is one of the more confusing aspects of life with student debt. A lender can change if the bank that issued the loan sells the debt to another financial institution. Servicers change if the lender hires a new company to handle loan servicing.

Borrowers can track their federal debt using the federal student loan database. The federal records show loan balances and servicer information. Private debt is a little more tricky. The best source for private student loan information is often a credit report.

Default and Delinquency

Borrowers who struggle to make payments need to worry about student loan delinquencies and defaults.

A delinquent student loan describes a loan with a past-due balance. When a loan becomes delinquent, it often triggers phone calls and emails from the student loan servicer. The major consequence of delinquency is that it gets reported to the credit bureaus. This adverse reporting hurts the borrower’s credit score and makes it harder to qualify for loans and lines of credit in the future. However, it is worth noting that delinquency is not usually immediately reported. Borrowers who miss their payment typically have a bit of time before being reported to the credit agencies. In the case of federal loans, it is 90 days before the negative reporting.

A loan in default is one that has become severely delinquent. When a loan is in default, the collection tactics become far more aggressive. Wages may be garnished, and borrowers may be sued in court. Borrowers may also face significant fees for defaulting. If you are already in default, there are several paths out of default.

Most borrowers, especially federal student loan borrowers, will find that delinquencies and defaults are avoidable. Even if you have little or no resources to make payments, working directly with your loan servicer can help avoid the negative consequences of a delinquency or a default.

Grace Periods, Deferments and Forbearances

Borrowers who leave school typically receive a six-month grace period. During this time, payments are not required, but the student loan does generate interest.

Most student loans have options for deferment or forbearance. Like the grace period, payments are not required during deferment or forbearance. These payment pauses are typically a limited resource and are most useful as an option of last resort. However, they can be an excellent tool in avoiding delinquency or default during financial hardships.

Loan Forgiveness and Debt Cancellation

Student loan forgiveness and debt cancellation mean the same thing: erasing student loans without paying off the balance in full.

This is another area where federal loans are far superior to private loans. Federal student loan borrowers have many options for student loan forgiveness.

Student loan cancellation has been a popular subject of discussion in Congress and the media, but it is unlikely at this point in time. However, there are strategies that borrower can use if they think forgiveness-for-all might happen.

Student Loan Refinancing and Consolidation

The terms student loan refinancing and consolidation are often used interchangeably, but they are very different processes.

Student loan consolidation is an important process for federal student loan borrowers. Consolidation may help borrowers gain eligibility for specific forgiveness programs or repayment plans. However, consolidation may also be a mistake. This guide to federal student loan consolidation should help borrowers determine whether or not it is necessary for their loans.

Student loan refinancing is when a borrower gets a new loan with a new lender to pay off their old loans. Borrowers use refinancing as a tool to get a lower interest rate and better loan terms. Refinancing can also be used to get a cosigner removed from a loan. Federal and private loans can both be refinanced. However, refinancing federal student loans is considered risky because the process converts federal debt into private debt. This conversion means the refinanced debt is no longer eligible for federal forgiveness programs or income-driven repayment. Refinancing private loans is significantly less dangerous. Borrowers interested in refinancing can use this page to find a list of lenders and tips to get the best deal.

Getting Help with Student Loans

Borrowers should contact student loan servicers with questions about payment processing and basic loan terms. Loan servicers are not always perfect, but they can be a useful source of information.

More complicated questions may require a bit of research. Understanding how student debt impacts buying a house, taxes or retirement may seem complex at first, but a few Google searches are often sufficient to answer these questions. Most student loan issues are do-it-yourself. Paid help usually isn’t necessary unless you are headed to court for bankruptcy or a lawsuit.

If you have a specific question and struggle to find an answer, I often respond to reader emails, forum posts, and article comments. Answering these questions helps me identify topics for this site to cover, and it helps borrowers find answers quickly.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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