Student Loans: How Student Loan Repayment Works

When you must begin repaying your student loans depends on whether it’s a federal or private student loan. If it’s a federal loan, it also depends on what type of loan it is.

When Payments Begin

Most student loans have a provision called in-school deferment and don’t require you to make any payments until you leave college or drop below half-time enrollment. Interest accrues during deferment and is added to your loan balance, increasing your monthly payments once deferment ends. 

Many loans also have a grace period. Direct loans have a six-month grace period, for example. Whether a Perkins loan has a grace period depends on the school that issued it. Interest usually accrues during a loan’s grace period, but no payment is required. Grace periods may be available after graduating, leaving school or dropping below half-time enrollment. Being called to active-duty military service or returning to school at least half time can extend your grace period. Consolidating your loans can shorten it. 

Repayment Options

Your monthly payment will depend on how much you borrowed, your interest rate and your repayment plan. You will make your payment to the company that services your loan, which may be different from the company that lent you the money. Some of the big loan servicers are Navient, Sallie Mae, MOHELA and NelNet. Even if you have a federal loan, you might not have the same loan servicer as your friend who also has a federal loan, since the U.S. Department of Education uses several different loan servicers. You can make manual, online electronic payments; sign up to have payments automatically debited from your bank account each month; or pay by mail. 

How long you’ll have to repay your loan depends on your lender. A private lender might give you 15 years after deferment ends (you’ll know your repayment term before you borrow). Federal loans have several repayment plans. Standard repayment gives you 10 years of equal monthly payments. Graduated repayment gives you 10 years as well, but payments start off smaller and grow over time, usually every two years. Extended repayment lets you make fixed or graduated payments over a term as long as 25 years. Pay as You Earn and Income-Based Repayment plans require payments of 10% to 15% of your discretionary income and the balance is forgiven after 20 or 25 years. Income-Contingent and Income-Sensitive repayment plans also vary with your discretionary or annual income. 

While you’re repaying your student loans, you might lose your job, take a pay cut, or take time out of the workforce because of illness, injury or military service – or parenthood. The next section will explain your payment options in situations when money is tight.

Student Loan Repayment During Financial Hardship

If you’re struggling to make your loan payments, ignoring the problem and skipping payments is not a good option. Working with your loan servicer can keep your loans and your credit in good standing. It’s important to contact your lender to discuss your situation and your options as soon as possible. If your loan goes into default, the consequences could be severe: damage to your credit score, inability to take out additional student loans, wage garnishment and withholding of tax refunds. So consider these options instead.

Deferment

Deferment allows you to temporarily stop making monthly payments on your loans. Your federal loans can be in deferment while you’re in school at least half time, while you’re actively serving in the military, while you’re unemployed, while you’re receiving state or federal assistance such as food stamps, while you’re earning less than 150% of your state’s poverty guideline, while you’re in the Peace Corps or while you’re qualifying for Perkins loan cancelation. 

You must complete your loan servicer’s required paperwork to formalize your deferment, which usually includes filling out an application and supplying supporting documents. Deferment will not be granted automatically unless you are enrolled in an eligible college or career school at least half-time. Even then, make sure you receive notice from your loan servicer that it has automatically placed your loans in deferment. If it hasn’t, you’ll need your school to send documentation of your enrollment to your servicer. 

You may or may not have to pay the interest that accrues during a deferment. It depends on your loan type. For example, if you have a Subsidized Direct Federal  Loan or Perkins Loan, you won’t have to pay interest; if you have an Unsubsidized Direct Federal  Loan or PLUS loan, you will.  If you have a consolidation loan or a Federal Family Education Loan (FFEL), you will not have to pay interest on any subsidized portion of the loan but you will have to pay it on any unsubsidized portion.

Any interest that accrues, but that you don’t pay, during deferment will be capitalized. That means it will be added to your loan. The result is that you may need to make larger monthly payments and your loan will cost more in the long run than if you didn’t put your loans in deferment. If you can make interest-only payments during deferment, however, you’ll be no worse off.

If you have a private loan, your lender is free to establish its own deferment and forbearance policies. Interest will accrue during these periods, which may last anywhere from 3 to 24 months. As with federal loans, you can either pay the interest as it accrues or allow it to be capitalized.

Forbearance

Forbearance allows you to stop making payments on your loans for a few months at a time. But it’s different than deferment in that interest always accrues during forbearance regardless of loan type, so deferment is a better option if you can get it interest free.

For federal student loans, your loan servicer may be required to grant you forbearance if you are in a medical or dental internship or residency; if your total student loan payments are 20% or more of your monthly gross income; if you serve in AmeriCorps; if you’re working toward Teacher Loan Forgiveness; if you qualify for partial repayment under the U.S. Department of Defense Student Loan Repayment Program; or if you’re active in the National Guard. The maximum period of a single mandatory forbearance is 12 months. You can apply for forbearance more than once if you qualify.

Discretionary forbearance, also called general forbearance, is an option if you experience high medical expenses, your employment situation changes or you need to temporarily suspend your loan payments for another convincing reason. Interest is always capitalized after forbearance ends unless you pay it as you go. A general forbearance can’t last longer than 12 months, though your lender might allow you to have more than one period of forbearance. If you have a Perkins loan, your total forbearance time can’t exceed three years.

When you apply for either option, keep your loans in good standing by continuing to make full monthly payments, if you can, until your request is finalized. 

Using Emergency Savings

If you’re a full-time student or a recent graduate, you may not have any emergency savings. If you’ve been working for a while, you might have an emergency fund. You emergency fund offers a possible alternative to deferment or forbearance, depending on what other expenses you need to cover with your fund, how long you expect your financial hardship to last and what flexibility you have with your other payment obligations. If you do have an emergency fund but it isn’t very large or you need the money for other purposes, consider using it to pay just the interest on your student loans if you qualify for deferment or forbearance. (See Why You Absolutely Need an Emergency Fund.)

Changing Your Repayment Plan

Deferment and forbearance are meant as temporary solutions to a short-term financial hardship. If you’re experiencing a long-term financial hardship, you might be better off switching to an income-based repayment plan so that your monthly payments will always be based on your family size and limited to a certain percentage of your income. The balance can even be forgiven after 20 or 25 years (but don’t forget about the tax consequences and see No Debt Forgiveness for the Tax Man to learn more). 

Next, we’ll talk about how to save money on interest and ditch that monthly payment by paying off your student loan debt faster.