Student Loans - Full Deferment Repayment

Last week we touched on the partial interest repayment option for private student loans. This week we are going to touch on the full deferment repayment option.

The full deferment repayment option is the most common repayment plan for students. Under this student loan repayment plan you don’t have to make any student loan payments while you’re in school. Also, many lenders offer a six month grace period after graduation if you select this plan.

During the six month grace period you aren’t required to make any student loan payments. It’s important to take note that interest will accrue during the deferment period so when your loans enter repayment your loan balance will be higher than the initial borrowed amount.

Of the four private student loan repayment options we have touched on this is the most expensive in terms of total amount students have to repay. Most lenders will allow you to make extra payments while you’re in school, even though you aren’t required to pay anything. If you select this payment method and are able to make some non-required payments you will save money on interest once your loans go into full repayment.

Student Loan Repayment Series: REPAYE

For this week's student loan tip we are going to touch on the Revised Pay As You Earn (REPAYE) income-based repayment option. 

REPAYE is an income-based repayment option for federal student loans. Under REPAYE your monthly student loan payment is generally 10% of your discretionary income.

In some cases, your monthly payment might be higher than it would be under the standard 10-year repayment option. The reason for this is because REPAYE takes into consideration your income and family size, so if your income increases over time your payment will likely increase. Every year you have to recertify your income by a deadline.

If you don’t recertify your income you will be removed from the REPAYE Plan and your monthly payment will no longer be based on your income. At this point, your unpaid interest will be capitalized. This means that the interest will be added to the principal balance of your loan, thus increasing the overall cost of your loan.

The repayment time frame for REPAYE is 20 years if all of your loans under the plan were for undergrad. If you have any loans that you’re repaying from graduate or professional school then you will likely be in the REPAYE program for 25 years (unless you are eligible for Public Service Loan Forgiveness).

Parent Plus Loans

Are you a parent with a parent PLUS loan for your child’s education? The PLUS loan is a student loan and if you work in the public sector or for a non profit you may be eligible for public service loan forgiveness. PSLF forgives your remaining amount of student loans, once you achieve the required 120 monthly payments under the correct payment plan, tax free. Be sure to check out the eligibility requirements to see if you’re eligible.

Taxability of Public Service Loan Forgiveness

Did you know that if you have student loans forgiven under the Public Service Loan Forgiveness the forgiven loan balance is tax free. However, if your student loans are forgiven under other types of income based repayment plans the forgiven balance is considered taxable income and you have to pay taxes on that balance in the tax year of forgiveness. If you are in one of these repayment plans you may want to start setting aside money now to cover the tax bill you will be faced with.