How Student Loan Repayment Works

Curious to know more about how student loan repayment works? With over 43 million student loan borrowers, you’re not alone!

This article clarifies how student loans work, the different repayment plans available, and what you can do to make repayment easier.  

How Student Loans Work

While taking out loans can be helpful in the moment, it comes with the expense of paying interest if you don’t pay back what you borrowed right away. Interest, whether simple or compound, is the money you owe your financial institution for letting you borrow funds. The higher your interest rate, the more expensive it is to borrow.

What your interest rate is depends on the type of loan you have and may depend on your credit score at the time of application. Private student loans typically come with higher interest rates than federal loans. Further, all federal student loan interest rates are fixed, while private loans can be fixed or variable. 

Depending on the type of student loans you have, your interest may start accruing while you’re still in school, or after you graduate, though this doesn’t mean you’re in repayment right away. During the pandemic, interest was paused from accruing on student loans for 3 years, but resumed for applicable loans as of September 1, 2023.

Types Of Repayment Plans

While there are several factors that go into how repayment works, including whether your loans were subsidized by the government at any point, your current income, and type of employment, all student loan borrowers enter repayment eventually.  

Federal Student Loans

If you have federal student loans, there are three basic types of repayment where your income does not impact your monthly payment:

• Standard repayment plan (10 years of fixed payments),
• Graduated repayment (10 – 30 years, where payments increase every 2 years),
• Extended repayment (up to 25 years, which lowers your payment but costs more over time)

There are also several federal income-driven repayment plans that can help lower your monthly payment, though you’ll usually be in repayment longer and pay more in the long run.

Private Student Loans

If you have private student loans, with a fixed interest rate, your payments will stay the same until the end of your repayment period. If you have a variable interest rate, your lender has the right to change your interest rate and monthly payment depending on the market.

When To Consider Refinancing

For those with federal student loans, you may look to refinance them in an attempt to save money or lower your monthly payment. That said, it’s important to consider that refinancing or consolidating through a private lender takes away the option for federal loan forgiveness and may also trigger the capitalization of any unpaid interest, which means it’s added on top of the amount you currently owe. Further, you cannot re-enter an income-driven repayment plan once you switch to a private lender.

If you have private student loans, then refinancing or consolidating can make a lot more sense, because you don’t have any benefits to lose by pursuing a lower payment.

Regardless of the type of loan you have, refinancing may help lower your monthly payment by one or both of the following:

1.     Lowering the interest rate: this is ideal and will result in you paying back the least amount of money over time. Your monthly payments will also likely decrease.

2.     Extending the repayment period: while this option may lower your monthly payment, you’ll end up being in repayment longer and usually pay more over time as your payments are spread out to keep the monthly amount low. That said, this option can still be helpful when it comes to managing your overall finances.

What Happens Next?

Now that student loan payments have resumed, it’s a great time to adjust your budget and reallocate what you might have to put towards your student loans. Luckily, Rocket Money^SM has a budgeting feature to make this process easy. We can also help cancel any unwanted subscriptions or negotiate your bills to free up some cash for future payments.

Download the Rocket Money app now and start today.