Private student loan repayment options

There are multiple options to consider when its time to pay back private student loans. (iStock)

Repaying private student loans can be tricky.

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There’s no one-size-fits-all method for private student loan repayment options, but there are methods to consider based on whether the borrower is looking to lower the interest rate, lower the monthly payments or make them go away, albeit temporarily.

Although the bulk of college students have federal government loans, there are a good number of students with private student loans. This means they got their money from banks, credit unions, online lenders and other non-federal institutions to finance their education.

With private lenders regulating their own terms and conditions, (unlike government-regulated federal loans) it’s up to the lenders to set the repayment terms. Private student loans also don’t qualify for a newer experimental plan called shared income agreements, which allows users to repay the loan based on their post-college income. They operate more as "real world" loans that resemble car notes or mortgages. Not to mention, private student loan interest rates are often higher and have more rigid repayment plans. As soon the loan is taken out, the interest begins accruing.

WHAT IS THE 2+2 PROGRAM TO REDUCE STUDENT LOAN DEBT?

Private student loan interest rates can be fixed or variable. They are often dependent upon the credit rating. Fixed rates may be higher, but guarantee stability and variable interest rates are more likely to go up these days than down.

According to a 2019 report by Sallie Mae, private student loans average about $8,430. While there’s not much flexibility, knowledge is power so take note of the following private student loan repayment options.

  • Fixed monthly payments immediately. Chipping away at the balance while still enrolled in college may be ideal if borrowers can handle the full monthly payments. They won’t be stuck with a huge bill after four years of college. Borrowers should make these payments throughout their college years and during any grace period the lender offers.
  • Interest-only repayments. This option allows borrowers to pay toward just the interest. Remember, as soon as the loan check is written, interest will start accruing. If borrowers can’t make the full monthly payment on their private student loan, they can at least work on paying the interest each month and during the grace period.
  • Partial interest-only repayment. Something is better than nothing. These payments don’t have to amount to a large monthly cost and can be as small as $20. Just something toward the repayment will go a long way in helping to alleviate some private student loan debt. Borrowers should continue to make partial interest rate payments during school and the grace period
  • Deferred repayment. By deferring payments, borrowers don’t pay anything toward the loan while in school. With this option, there's no concern about a monthly bill until after the borrower graduates and after the grace period ends. But most borrowers should avoid the deference plan to prevent student debt because this option will leave them with the largest chunk to repay.
  • Refinance student loan. Another option is to refinance student loans to get a lower rate. This would lower monthly payments and make them more manageable, while potentially saving money over the course of the loan.

CREDIT CARD VS. PERSONAL LOAN: WHICH ONE IS A BETTER OPTION?

Unfortunately, qualifying for student loan forgiveness programs are difficult and limited to federal government student loans.

Some of the largest private student loan companies offer a grace period to help borrowers get on their feet after graduation. The lender assumes the user will be in the workforce soon after graduating and allows time to find employment before the loan payments begin.  Although most grace periods are six months after graduation, some private student loans give up to nine months to repay the loan.

Sallie Mae notes that many families are getting a head start on paying back loans. In fact, 41 percent are making payments on student loans while in school. Try using a private student loan repayment calculator to figure out what your monthly payments would be.