Is an Extended Repayment Plan Right for Me?

Choosing the Right Student Loan Repayment Options

The BIG Ideas:

  • When you apply for private loans, you can choose a standard repayment plan or an extended repayment plan for paying back the money you owe.
  • Because the repayment option you choose determines your rate, it cannot be changed after application.
  • Learn about the three repayment options available during the in-school period:
    • Principal and interest payments 
    • Interest-only payments 
    • Deferred principal and interest payments

Let’s face it, the journey to college is filled with many choices – from finding the right school to picking a major, to deciding on the right loans to help make college possible.

And even after you figure all that out, you’re still not done making choices. You’ll need to make a very important decision when you actually apply for student loans: how you’ll pay them back.

Sure, the thought of paying anyone back is not fun. But it is very important that you fully understand the student loan repayment options you have to ensure you make the right choice for your budget.

That decision can only be made at one point– at the time you apply and make your final decision about your loan. It’s because interest rates are set based on repayment type and the sooner you pay back the loan, the better rate you’ll receive and the less interest you’ll end up paying.

So, if you’re a parent co-signing for a student, you’ll really want to get involved in this decision about student loan repayment plans. If it’s in your budget, as a parent, you may want to consider helping the student pay the loan while they are in school to help them get a better rate and keep interest costs lower.

There are essentially three repayment options for private loans. Let’s take a look at them.

Immediate repayment. With this option, you’ll have to repay the loan, including principal and interest as soon as the money is available to the student. This option is ideal if you’re looking to save money because you’ll start paying the loan right away while the student is in school.

Since you’re making payments from the beginning, you pay less interest, saving you money over the life of the loan. The biggest disadvantage of this option is that the student may not have the money since they don’t have an income to pay back the loan while they’re in school.

Interest-only repayment. If you want to keep payments lower while the student is in school, you could opt to pay just the interest portion while the student is in school and for six months after graduation, which is called a “grace period.” After this grace period ends, your payments will increase to include interest and the principal. With this option, you’ll end up paying more in interest than you would with immediate repayment, but it may work better for a student’s budget while they’re in school.

Deferred repayment. If you want to avoid making principal and interest payments while the student is in school, deferred repayment may be right for you. With this option, you won’t have to make any payments of principal or interest until the student graduates or leaves school and during the “grace period.”

It is, however, important to note that even though payments aren’t due, interest is due and it accrues while the student is in school. This means you’ll end up paying more over the life of the loan with this option.

Note that principal and interest payments will be due after graduation or school withdrawal and after a six-month grace period. This option is ideal if you expect the student will be in a better position to pay back loans after they graduate and begin earning money.

If you choose this option, be prepared to see a principal amount that’s more than the amount you originally borrowed due to interest accrual.

Repayment Options at a Glance

Immediate repayment Interest-only repayment Deferred repayment
How it works You make principal and interest payments when the money is available to the student. You pay the interest on the loan only while the student is in school. Your payments will increase to full repayment of principal and interest when the student graduates or withdraws from school. You don’t make any payments until the student graduates or withdraws from school.
Pros Pay less interest over the life of the loan.

The loan is paid off by the term selected.

This is the least expensive option since principal payments are being made immediately.

Borrowers cover interest, so payments are manageable (compared to immediate repayment). A more affordable option while the student is in school and doesn’t have the income to repay the loan
Cons Not all borrowers have sufficient income to make the payments. Since only interest is being paid, the loan balance remains the same, even though you are making payments.

Total interest paid is more than with immediate repayment.

It’s the most expensive payment option over the long run, since

interest “accrues” or adds up and is added to the principal balance.

Your loan balance may be greater than the amount you originally borrowed because of accrued interest.