Lana Oconnell
Student loans are a common way to finance higher education, but they can be confusing to navigate. Understanding the terms of your loan is critical to knowing when repayment starts and how interest accrues. Most federal loans offer a grace period following graduation, but some private loans may require immediate repayment. Federal loans generally provide more flexible repayment options, including income-driven plans, deferment, forbearance, and loan forgiveness options. Interest on student loans typically begins accruing immediately after disbursement, and while the government pays interest on subsidized loans during enrollment and the grace period, unsubsidized and private loans accrue interest that students must pay to reduce overall costs. Different loan types have different repayment timelines and obligations, so it's essential to review your loan agreement to understand your specific responsibilities.
| Characteristics | Values |
|---|---|
| When you need to start paying back federal loans | 6 months after graduation |
| Interest accrual on federal loans | Interest accrues from the day the loan is taken out |
| Interest on subsidized loans | Paid by the government until 6 months after graduation |
| Interest on unsubsidized loans | Paid by the student |
| Interest on Parent PLUS loans | Accrues from the disbursement date |
| Repayment of Parent PLUS loans | Parents can choose to start repayment immediately or defer until their child graduates |
| Repayment of private loans | May be required while still in school |
| Loan forgiveness | Available for federal loans after 20-25 years or at the age of 65 |
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What You'll Learn
Federal loans and grace periods
Federal loans typically come with a grace period, which is a set amount of time after you leave school during which you are not required to make any loan payments. The length of the grace period depends on the type of federal loan you have.
The Federal Stafford Loan and Federal Direct Loan both offer a six-month grace period. This means that if you take out one of these loans, you will have six months after leaving school before you need to start making payments. It's important to note that if you let this initial six-month grace period lapse, you will not be eligible for a new grace period in the future. However, if you return to school during the grace period and maintain at least half-time enrollment, you may be granted another six-month grace period.
The Federal Perkins Loan has a longer grace period of nine months. After this period expires, the billing cycle starts, and interest begins to accrue. However, you are not expected to make your first payment until the end of the first quarter of the billing cycle. For example, if your grace period ends in December, your first payment will be due in March. Like the other federal loans, if you return to school during the grace period and maintain half-time enrollment, you will be given another grace period.
It's worth noting that federal loans also offer in-school deferment, which means that as long as you are enrolled at least half-time, you are not obligated to make payments on your loans. This deferment period can continue if you decide to pursue further education, such as a master's or PhD.
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Interest accrual and repayment
There are two main types of student loans: federal and private. Federal loans, such as Federal Direct Loans, typically offer a fixed interest rate, while private loans may offer a choice of fixed or variable rates. The interest on a student loan begins to accrue from the day the loan funds are disbursed to the borrower or their school. This is known as interest accrual.
During the time a student is enrolled in school, federal loans may be deferred, meaning the borrower is not required to make principal or interest payments. However, it's important to note that interest will continue to accrue during this deferment period. At the end of the deferment, any unpaid interest will be capitalized, meaning it will be added to the loan's current principal, increasing the total loan cost.
To minimize the impact of interest accrual, it is advisable to make interest payments while still in school, if possible. This can help keep the total loan cost down. Additionally, some federal loans offer subsidized options, where the government pays the interest until six months after graduation. In contrast, unsubsidized loans start accruing interest immediately, and the interest will grow over time.
For private student loans, the interest rate may vary over the life of the loan. It is important for borrowers to understand the terms and features of their loans, including the interest rate and any associated fees. Private lenders may offer flexible repayment options, but these are not required by law, as is the case with federal loans.
By understanding the interest accrual and repayment process for student loans, borrowers can make informed decisions about their loan choices and develop effective strategies for managing their debt.
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Loan cancellation and death
In the event of the borrower's death, federal student loans are discharged. This includes Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans for graduate and professional students. Even if there was a co-signer on the loan, federal student loans are discharged upon the death of the borrower. However, there may be tax implications associated with discharging a federal student loan if the borrower died before January 1, 2018, due to the Internal Revenue Code ("IRC") Section 108, which treated canceled student debt at death as income.
The process for loan cancellation in the event of death involves contacting the loan provider and filling out the necessary paperwork, which typically includes providing a copy of the death certificate.
For private student loans, the discharge policies can vary depending on the lender. It's important to note that co-signers are generally released from repayment obligations for loans borrowed after November 20, 2018. However, there may be income tax implications for loans discharged before January 1, 2018, or potentially after December 31, 2025.
In the case of Parent PLUS loans, if the parent who took out the loan passes away, the loan is typically discharged, and the responsibility does not fall on the child. However, if the child was a co-signer on the loan, they may be responsible for repayment.
It is always advisable to consult with a legal or financial professional to understand the specific implications and procedures related to loan cancellation and death, as regulations and policies may vary based on location and the specific loan terms.
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Postgraduate loan forgiveness
If you have a postgraduate degree, you may be eligible for student loan forgiveness. Loan forgiveness means that you are no longer required to repay some or all of your loan.
There are a few student loan forgiveness or discharge programs that you may qualify for. These include:
Public Service Loan Forgiveness (PSLF)
This program is for full-time employees of the US federal, state, local, or tribal government or non-profit organizations that hold federal student loans and have made 120 payments under their income-driven repayment plan.
Teacher Loan Forgiveness
Full-time teachers who have worked for five consecutive years in a low-income school may be eligible for up to $17,500 forgiven from their federal student loans.
Closed School Discharge
If your school closed while you were enrolled or not long after you withdrew, you could be eligible for a 100% discharge of your federal loans.
It is important to note that if you have borrowed from a private lender, your forgiveness options may be limited. Federal student loans are more likely to offer forgiveness programs. If you are unable to find your loan information on the Federal Student Aid website, your student loans are likely private.
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Private loans and repayment
Private student loans are typically offered by banks, credit unions, and financial institutions. These lenders are not required to offer you any relief, so it is important to understand the loan's terms and conditions before borrowing. While some private student loans require immediate repayment, others offer a grace period during which interest may or may not accrue. During this time, interest may be added to the principal balance when the grace period ends and repayment begins.
Private loan repayment terms vary by lender, and some lenders may require you to start making payments while still in school. These payments can be full or interest-only. Many private lenders offer flexible repayment options that can be tailored to your situation. For example, Ascent offers repayment options for 5, 7, 10, 12, 15, or 20 years, depending on the loan type. Eligible borrowers may also be able to pause payments for up to 9 months after graduation or take advantage of a progressive repayment program that gradually increases the payment amount over time.
If you are struggling to make payments, it is important to contact your lender to discuss your options. Reputable private student lenders will work with you to make a plan to stay out of default. You may be able to reduce your payment by extending your repayment plan, but this will cost you extra interest overall. Many lenders will reduce your interest rate by 0.25% if you set up direct debit. It is also important to understand your rights as a servicemember, as you may be entitled to have your interest capped at 6%.
It is important to note that student loans, whether private or federal, cannot be included or dismissed in a bankruptcy. However, there is a separate process apart from the bankruptcy process that allows for the discharge of student loans in cases of permanent hardship, such as permanent disability.
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Frequently asked questions
This depends on the type of loan and your circumstances. Federal loans offer a grace period following graduation, usually lasting 6 months, but some private loans may require immediate repayment. Interest on loans typically starts accruing immediately after disbursement.
Making interest payments while still enrolled in education can reduce overall costs. It is also worth checking if there are any benefits or discounts available, such as cashback rewards for automatic payments.
This depends on which repayment plan you are on and when you received your first loan payment. For example, Plan 1 loans are written off 25 years after the April you were first due to repay, or when you turn 65, whichever comes first.
