If you’re considering taking out a private student loan to fund your education, it’s important to carefully review and compare the repayment terms offered by different lenders. Private student loan repayment terms can vary widely and can have a significant impact on the total cost of your loan, as well as your ability to manage your debt after graduation.
In this post, we’ll dive further into the different terms that are available depending on your private student loan, how longer terms affect monthly repayment plans, and the tools available to you to easily compare student loan repayment terms side by side.
Private Student Loan Repayment Terms
Private student loans accrue interest while you are in school. Federal student loans have the potential to accrue interest while enrolled in school, but it depends on the loan you take out, such as a federal unsubsidized loan. Regardless, most private and federal repayment plans don’t start until about six months after graduation.
Each lender is unique and as such, they will offer different repayment options. However, there are four common repayment plans.
Keep in mind that the repayment plan you select depends on your individual needs. Here’s a little more background on each one:
Immediate Repayment
With Immediate Repayment, you will be able to make monthly payments on your loan as soon as it is disbursed. Making monthly payments right after your loan is disbursed can help you minimize the amount of interest that accrues and save you money in the long run.
However, you’d be a college student while making these payments. If the stereotypes of eating ramen and pizza pockets to make ends meet tell us anything, it’s that it could be really difficult for many students to make consistent monthly payments. If you plan on having a job while in college, it might make sense for you.
Interest-Only
Your lender would allow you to only make interest-only payments while you are in school. With an interest-only repayment plan, the borrower only has to worry about paying back the interest that has accrued on the loan each month while in school. For example, if a loan of $50,000 accrued $50 in interest that month, you’d only be responsible for those $50 that month.
After you graduate, it might be easier for you to make monthly payments toward your student loans. Because interest will compound, making interest-only payments will reduce the total amount of interest that you pay over time. At the same time, it might also be more manageable to pay off the interest of your loans compared to making payments going toward your student loans and the accrued interest.
Similar to immediate repayment plans, it might be a financial burden to enroll in an interest-only repayment plan while you are in college since you would still have to pay interest on your loans while studying.
Fixed Monthly Payments
Fixed monthly payments, also known as partial interest repayment terms, allow borrowers to make fixed monthly payments while still enrolled in college. Fixed payments are typically between $20 and $50 and go toward your interest, helping you keep the overall debt amount lower by keeping the interest from accruing. For some students, this might be more manageable since they would have to pay a little bit of money that will go toward their interest rate, compared to other repayment plans.
However, by the time you graduate, you’re still going to find yourself having to pay more than you borrowed due to the partial interest that you didn’t pay with your plan. Yet, you could expect your loan balance to not grow as much thanks to at least paying some of that partial interest.
Full Deferment
A full deferment repayment plan is similar to how federal student loans work, in which students can expect to start paying off their loans post-graduation. Under this plan, you wouldn’t be responsible for paying off your student loans while you’re enrolled in school, giving you time to plan. Many lenders offer a six month grace period after graduation, making it easier for recent graduates to find employment without having to worry just yet of their student loans.
This repayment plan does have its drawbacks, particularly that your loan will accrue interest while you are studying. As such, your monthly payments may be bigger, and thus, it could take you longer to finish paying off your loans.
How is a Monthly Loan Payment Affected by a Longer Term?
Student loan repayment periods range in length, roughly between 10 to 30 years. As such, you’d think that with the long period of time you have to pay off your loans, your monthly payments will be low. While that is true, keep in mind that loans accrue interest. If you find yourself with a long-term student loan, you’ll still be paying a lot since you’ll also be paying for the interest of the loan. The longer the term, the bigger the interest. Shorter repayment periods tend to attack debt more aggressively, and thus, the monthly payments will be higher than they would be on a longer repayment period.
Compare Standard Repayment Terms Side-by-Side
How would a loan differ based on the repayment terms? Perhaps comparing terms side by side might be an easy way to see for yourself.
By using any student loan calculator online, you can determine how the standard loan repayment terms might affect your monthly payments, but also the long-term cost of the loan.
Let’s say you have a $30,000 loan with a 5% interest rate. Under a 10-year repayment term, you can expect to pay $318 a month. However, the lifetime cost of your student loan would be $38,184 paid over 10 years.
What if we use the same loan with the same interest rate but with a longer term, such as 20 years. While your monthly payments are significantly less, $198, the lifetime cost of your student loan would be $47,517 over 20 years.
What if we try one more, with the same loan, interest rate, but a shorter term, like 5 years? Your monthly payments will be $566. However, the lifetime cost of this student loan would be $33,968 paid over 5 years.
Since interest is compounded monthly, repayment plans with shorter terms will help you tackle more debt at a faster rate. Keep this in mind while you’re in the market for a student loan.
How to Figure Out Which Repayment Term Will Be Best for You
Aside from the loan simulator, there are many other resources that can help you find the best repayment plan for you.
The loan simulator, a tool created by the Office of Federal Student Aid, allows you to get a first-look at the federal student loan repayment plans you may qualify for if you’re looking to find repayment strategies, if you’re struggling with paying off your student loans, or if you want to potentially borrow more.
Sparrow, on the other hand, is a great resource if you’re looking into private student loans. Our platform gets you personalized rates and allows you to compare multiple loan offers from different private lenders side by side. Lenders on the platform offer a wide range of repayment options, such as immediate repayment, fixed monthly payments, interest-only payments, and full deferment payments.
Final Thoughts
Student loan repayment terms are complicated, regardless of whether you have public or private loans. The good news is that there are so many different options available to help you find the right repayment plans for you. It’s simply a matter of being able to compare your options and weigh out the right fit based on your needs as a college student and the loans that are available to you.
Take the next step in conquering your student loans by creating a free Sparrow account. Apply once and get real rates fit for your unique financial situation. The best part: the platform is completely free and won’t impact your credit score!