If you’re facing repayment on your private student loans, you may need to know about monthly payment options; especially if your budget is tight. Or if you’re shopping for an in-school loan and want to understand the types of repayment plans lenders offer, we have the insights to help you.
Private student loan repayment options
There are six primary repayment options available when it comes to private student loans. These include:
- Immediate repayment (full principal and interest)
- Interest only
- Partial payments
- Deferred repayment
- Graduated repayment
- Student loan refinancing
Depending on where you are in your student loan journey (i.e. still in school vs. in repayment) you will have different repayment options to choose from. For example, interest only payments are common while you’re still in school, but may not be available from most lenders during the repayment period unless you are approved for some type of hardship deferment. And it’s also important to note that not all lenders offer multiple repayment plans.
Federal vs. Private Student Loan Repayment Options
While this article focuses on private student loan repayment options, it’s worth mentioning there is a difference between federal and private loan plans. If you have federal student loans, you may be eligible for a number of repayment plans that take your income into consideration, or that allow you to extend your repayment term based on your loan balance.
Making payments on student loans while in school
Private student loan lenders give you the option (ok, strongly encourage you) to make payments while in school. Unlike a subsidized federal loan where payments are automatically deferred and the interest is paid by the government, private loans are not automatically deferred and interest is charged throughout the life of the loan. This includes the moment the loan is disbursed, as well as the entire time you’re in school, during the grace period, and during repayment. But lenders realize that most students are not in a situation to take on repayment while they’re in school. So they give you a number of options up front.
Immediate Repayment
Immediate repayment means you would start repaying both the principal and interest on your loan every month while you’re in school. It basically means you just enter repayment right away. The benefit to this, assuming you can afford this option, is you’d end up paying your loan off much faster and would save a considerable amount of money in interest fees over the life of the loan.
Interest Only Payments
A common choice among students, interest only payments mean you just pay the amount of interest that accrues on your loan every month. You would not be making a dent on your principal balance, but this option does mean you would avoid unpaid interest from being added on top of your outstanding principal balance. If that were to happen, your starting loan amount in repayment would be higher, and you’d essentially be paying interest on top of interest.
Flat Payment (or partial payments)
Lenders may offer to schedule a low, fixed monthly payment while you are in school. Some lenders may even talk about a partial payment. Whatever the name, know this. Any payment that is less than a regular monthly payment of principal and interest is not going to reduce the actual loan balance. It will simply help you stay up-to-date with the interest that continues to accumulate. And it can certainly help you avoid having too much interest added (capitalized) on top of your outstanding principal balance at the start of repayment, thereby increasing the overall cost of the loan. But even if your lender does not place you on a partial payment plan or flat payment plan, you can elect to send money whenever you are able. You may want to consider doing so if you come into extra cash throughout the year, such as a tax refund or birthday or holiday cash.
Deferred Repayment
If you are unable to make any payments while in school, no worries. You will be given the option of simply postponing payments altogether. Your lender would place your loan(s) in a deferred status and bill you for regular monthly payments after you graduate and complete your grace period. Make sure you read the terms and conditions with this option. Your lender could have certain conditions you must meet (i.e., at least half-time enrollment) in order to maintain your loan deferment.
Private Student Loan Repayment After Graduation
Depending on the repayment option you choose, the repayment of your private student loans typically begins after graduation and following a grace period, usually 6 months. Your lender will most often place your loans on a standard repayment plan to put you on a path of fully repaying your loan within 10 years, sometimes longer depending on your balance.
Some lenders offer modified repayment terms. But you usually must request this in writing. Here are some common examples:
Graduated Repayment
Lenders like Sallie Mae offer a Graduated Repayment Period that lets you pay a lower monthly payment for a year. The amount of the payment usually equals the interest. You can request this after your graduation or grace period ends. The benefit here is you’d be allowed time to get your bearings after you finish school, which may include landing a job, possibly relocating, and earning a regular salary while juggling other obligations. After the year is over, you would begin making payments of principal and interest.
Refinance My Student Loans
Since repayment plans and loan terms vary by lender, and since interest rates change over time, you may want to consider refinancing your student loans. This can be a very effective way to manage your repayment by restructuring your loans. Refinancing allows you to combine multiple loans together (including both federal and private student loans), or you can refinance a single loan. Reasons you may want to consider refinancing as part of your repayment strategy include:
- Qualifying for a lower interest rate – You could save money in the long run by paying less interest on your loan, potentially thousands of dollars.
- Reducing your monthly payment – By extending your repayment term, you could lower your monthly payment amount. Depending on your outstanding balance (and in some cases your career field), you may be able to extend your term to 25 years. And there are no prepayment penalties, so you can always accelerate your repayment later in order shave time—and money—off the clock.
- Releasing a cosigner – Thank God for mom or dad, or some other equally saintly person who helped you pay for your higher education! But it is doubtful they want to be on the hook as a cosigner for the rest of their lives. Refinancing results of paying off your underlying loan(s) that may have been cosigned. And once that happens, your cosigner is basically released from their obligations. But know this. 1) You will need to qualify for the refinance on your own merit. This is a credit-based loan. 2) There are some lenders that also offer parent loan refinancing where the parent’s loan can be transferred to the student.
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Private Student Loans Income Based Repayment
Unfortunately, there really aren’t any income-based repayment plans for private student loans. These exist under the federal student loan program, but they are not generally available for private loans. However, if you are having challenges in repaying your loan, it’s best to contact your lender to explain your situation and explore options such as those explained above or in the next section.
Private Student Loan Deferment
If you encounter a hardship, private student loan deferment may be an option. This means you can ask your lender for a temporary postponement of payments where monthly obligations could be waived for a short period of time, such as 3 or 6 months. Some lenders may offer a forbearance, but it’s practically the same thing. Regardless of the lender calls it, a deferment or forbearance gives you time to get back on your feet. Some lenders may still require that you make interest payments each month, others may allow you to postpone both interest and principal. If you’re not in a position to pay the interest during this time, it will be added to your principal balance at the end of the deferment resulting in not only a higher balance, but often a higher monthly payment.
Can I Deduct Private Student Loan Interest?
Yes, you may be able to deduct the amount you paid on private student loan interest on your tax returns. Most private student loans are eligible for the student loan interest deduction, which allows you to deduct up to $2,500 in interest on federal and private student loans each year on your tax filings. Of course, this is subject to income limits.
Other Ways to Save Money on Student Loans
Most lenders offer auto-debit discounts, such as a 0.25% or 0.50% interest rate if you agree to have your monthly payments automatically deducted from a bank account. You’ll want to sign up for this service at the start of repayment, if possible, to take advantage of what could be sizeable savings over time.
Private Student Loan Relief
During the COVID-19 pandemic, most lenders chose to help borrowers with some form of private student loan relief. What this means is they offer a temporary forbearance (sometimes called an emergency forbearance or hardship deferment) to give you a break on your regular student loan payments. This does not mean lenders are waiving interest or automatically postponing payments as part of the CARES Act, the way the federal government has done on federal student loan loans owned by the U.S. Department of Education (ED).
For those impacted by COVID-19, private student loan lenders began offering temporary relief—anywhere from 30 days to 12 months—from regularly scheduled monthly payments. Because this is discretionary, policies and programs will vary by lender. If you are still having difficulty making your private student loan payments due to impacts from COVID, you should contact your lender.
Learn more tips strategies for paying off private student loans.
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