Understanding your student loans and how to repay them

http://www.savingforcollege.com/articles/understanding-your-student-loans-and-how-to-repay-them-736

Writer for NerdScholar, Guest Contributor.

Seven out of 10 recent graduates have student loans, so you’re not alone if you’re one of them. The average student debt hovers around $30,000—a big number for someone just leaving college. With so many loan repayment options out there it’s important for borrowers to explore all of their repayment options and make sure they find the plan that best fits their needs and their budget.

Here’s a quick breakdown of repayment plans:

• Standard repayment. Payments are a set amount each month over a period of 10 years.
• Graduated repayment. Payments are lower at first, and then increase until repaid.
• Extended repayment. This plan takes place over a period of up to 25 years, instead of the usual 10.
• Income-based repayment. For income-based plans that require “partial financial hardship,” payments can range from 10% to 15% of your discretionary income. Other income-based plans calculate payments based on your annual income.
• Loan forgiveness. Those people in public service careers like teachers, military members, nurses, police, firefighters, or AmeriCorps or Peace Corps volunteers, can qualify for federal loan forgiveness after 10 years of payments.
• Consolidation or refinancing. You can consolidate or refinance your loans to simplify the repayment process down to one monthly payment and interest rate.

Options such as applying for an income-based loan repayment plan, consolidating multiple loans into one monthly payment with one interest rate, or refinancing can also be helpful for students who took out more than they needed in loans. It is always better to be up front and honest with your loan servicer, whether federal or private, if you think you may have trouble repaying your loans. Missing payments before exploring your options can result in default, which can negatively affect your credit score.

Know Your Interest Rates

Interest, or the fee you pay to borrow money for your student loan, is calculated as a percentage of the loan amount. The amount you pay is based on an interest rate—the percentage charged to borrow money. Even though it may not seem like it, the repayments for a loan with a 4% interest rate versus a 6% interest rate can vary dramatically.

The interest that accrues on your loan each month is determined by a daily formula. According to Robert Kelchen, an assistant professor at Seton Hall University, paying back a loan in full requires that you pay the original amount you borrowed—also referred to as the principal—in addition to the interest on the loan. So the lower the interest rate, the less you’ll owe on top of the original amount borrowed.

Is Consolidating Right For Me?

Undertaking multiple loans typically means you’ll be required to make several individual monthly payments, each potentially attached to a different interest rate. “The major advantage [of consolidating your loans] is for borrowers who have multiple loan types or loan servicers and may find it more manageable to have one point of contact for just one payment,” says Obenauer. Consolidating your student loans can also extend the repayment period, resulting in a lower and more feasible monthly payment. But extending your loan also means you’ll pay more interest in the long run.

To consolidate federal loans, students should apply through the Department of Education’s website at studentloans.gov. The site also offers a Loan Repayment Estimator to help plan financing, or refinancing, your education.

Alexandra Rice writes for NerdScholar, a website run by NerdWallet, helping students and recent grads make smarter financial choices in college and beyond.