Choosing the Right Student Loan Repayment Option

Choosing the Right Student Loan Repayment Options

The BIG Ideas:

  • When you apply for private loans, you can choose from several repayment plans.
  • Because the repayment option you choose influences your interest rate, it cannot be changed after you apply.
  • Learn about the three repayment options that are typically available: immediate repayment, interest-only repayment and deferred repayment.

Let’s face it, the journey to college is filled with many choices – from finding the right school, picking a major, and even deciding on how you’re going to pay for your education! Even after you figure all that out, you’re still not done making choices…especially if you choose to use private student loans to pay for college.

See, applying for private student loans leaves you with one very important decision: how you’ll pay them back.

When it comes to private student loans, interest rates are influenced by the repayment type selected at the time of application, so it is very important that you fully understand the student loan repayment options available to you. After all, you need to ensure you make the right choice for your budget, and your future.

There are generally three repayment options for private student loans: immediate repayment, interest-only repayment and deferred repayment.

Immediate Repayment

With this option, you’ll make payments that include both principal and interest once the loan is fully disbursed to the school. This option may be ideal if you’re looking to save money because you start paying the loan immediately. However, some borrowers may not have sufficient income to make payments, especially if they are in school. Let’s break it down:

  • Full payments, including principal and interest, begin immediately when the loan is fully disbursed, while the student is still in school.
  • Because payments begin immediately, less interest is paid over the life of the loan, making immediate repayment the least expensive repayment option.

Interest-Only Repayment

If you’re looking to make payments more manageable while still saving a little, you could opt to pay just the interest portion of the loan while the student is in school. With an interest-only repayment plan, payments increase to include both principal and interest 6-months after the student graduates or withdraws from school. This six-month period is typically referred to as a “grace period”.

With this option, you end up paying more in interest when compared to immediate repayment, but it may work better for a student’s budget. To summarize:

  • While a student is in school and during the “grace period” payments are due on the interest of the loan. Following graduation or withdrawal from school, and at the conclusion of the “grace period”, payments increase to include both principal and interest.
  • Since only interest is being paid while in school and during the “grace period”, the loan balance will remain the same until principal payments begin.
  • When compared to immediate repayment, the total amount of interest paid over the life of the loan is more.

Deferred Repayment

If you want to avoid making any payments while the student is in school, a deferred repayment plan may be right for you. With this option, you won’t make any payments until the student graduates or leaves school, and the “grace period” has ended. This option is ideal if you expect the student will be in a better position to pay back loans after they graduate.

However, it is important to note that even though payments aren’t due, interest is accruing. So, be prepared to see a loan balance that’s more than the amount you originally borrowed. Additionally, interest will continue to accrue on the higher loan amount, which means you’ll end up paying more over the life of the loan with this option.

  • Full payments, including principal and interest, begin 6-months after graduation or withdrawal from school.
  • Usually, this is the most expensive repayment option since interest accrues and is added to the principal balance of the loan. When you enter repayment, your loan balance may be greater than the amount originally borrowed because of the accrued interest, and interest will continue accruing on the higher loan balance.

Brazos is Here to Help!

For more than 40 years, Brazos Higher Education has been helping make education more affordable for students and parents. As a non-profit, we can offer you low rates and personal service to help you save money and build the bright financial future you’ve earned with your degree. Contact us today!