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Intro to student loan repayment options

There are lots of ways to approach student loan debt. Here’s an overview of some of the options.

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You may or may not be aware, but actually, about three-quarters of students leave school with some kind of student loan debt, so navigating the ins and outs of repaying student loans is pretty much a fact of life for a lot of folks.

But before we get too far into the details, let's start with a bit about the loans themselves. There are two basic types of student loans: private—which means that your lender is going to be a private institution, like a bank, or federal—which means they’re issued by the government. Most student loans are some sort of federal loan so we’ll mostly be focusing on these.

Now, there are two different kinds of federal loans: subsidized and unsubsidized.

Subsidized loans, for those who qualify financially, offer better terms. They’re called subsidized loans because they’re subsidized by the US government, meaning the US government actually covers the cost of interest on these loans during various periods of the loan’s existence so you don’t bear the full weight of borrowing all this money.

With unsubsidized loans, on the other hand, you don’t get the same benefits, and you’re responsible for the interest on the money borrowed from the day you take out the loan.

So, for example, if you choose not to pay your interest while you’re in school—that interest will accrue.

That is, it will accumulate from month-to-month. The interest will be added to your principal every month, and the next month, your previous month’s balance will be used to calculate the amount of interest that will be added. This can cause your principal balance to grow exponentially when you don’t make payments.

Now right after you leave school, the government might offer you a “grace period” of around six months where you don’t have to start paying back your loans right away. This can allow you some time to figure out what’s next—whether it’s finding the right job or going back to school.

During this period, like while you’re in school, the government covers your interest on most subsidized loans, except direct subsidized loans that were issued between July 2012 and July 2014…

and unsubsidized loans.

Now let’s look at some of the repayment options you have. You basically have four options here and we’ll go over some of these in detail in other videos.

First, you can pay ahead of schedule, where if you’ve got the money you can pay more than your monthly payment on any type of repayment plan. Doing so will save you in interest over time.

Or, you can pay on a schedule either with a standard ten-year plan or a ten-year graduated plan.

The standard plan is basically the default plan for paying back your loans. Your monthly payment is fixed over a ten-year period and it’s one of the quickest ways to pay down your loans. With the graduated plan, you’re paying off your loan in the same amount of time, but your monthly payments start out small and increase every two years.

You can also pay on an income-based plan.

This can be helpful if you can’t afford to make the monthly payments on a standard ten-year plan. If you’re eligible, your monthly payment is determined by how much you earn.

You also may have the option of delaying your payment with deferment or forbearance if you’re in a situation where you really can’t make any payments at all.

Common examples of this would be if you have some sort of financial hardship, or if you decide to continue your education.

Now keep in mind that not paying back your student loans is not advisable. Even missing payments can affect your credit score.

And, after only a few months of missing payments, your loans may go into default, which can have major consequences. By this point, you won’t have the option of putting your loans into deferment or forbearance. The balance on your loan can become immediately due and in some cases the government can even take the money you make from your employer to pay off your loan. It can also be really bad for your credit score, so going into default is something you really want to avoid.

One last caution about student loans: filing for bankruptcy, which can result in the forgiveness of some types of debt, does not generally allow your student loans to be forgiven.

So if you know you won’t be able to pay off your loan, you should contact your lender immediately and they can help you review your options.

There are a lot of options when considering how to pay of your student loans. In subsequent videos, we’ll look at a couple of these so that if you decide you need to make a change in your repayment schedule, you’ll be better armed for having that conversation with your loan officer, and you’ll have a better sense of what may work best for you.

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