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When you take out a student loan from a private lender, you’ll typically be offered more than one repayment plan. When choosing a student loan repayment plan, there are a couple of things to keep in mind.

First of all, remember that interest starts accruing as soon as your student loan is disbursed (that’s when you or your school receive the funds). This is also true of unsubsidized government student loans.

Also, the longer your loan term, the more you’ll pay in interest.

The standard repayment term on government student loans is 10 years. Some private lenders offer shorter and longer repayment terms — 5, 7, 15 or 20 years, for example. When you pick a loan with a shorter term, you can often get a lower interest rate, but your monthly payments will be higher because there are fewer of them.

There are four common repayment plans for private student loans, although not all lenders offer each of them:

  • Immediate repayment (full monthly payments while still in school)
  • Interest-only repayment (you pay only the interest on your loan while you’re still in school)
  • Partial interest repayment (you make a flat monthly payment while still in school that only covers part of the interest you owe)
  • Full deferment (you pay nothing while you’re enrolled in school, and your loan balance grows)

Pros and cons of repayment plans

If you’re able to swing it, choosing an immediate repayment plan with full monthly payments starting as soon as you take a loan out will minimize the interest you pay, resulting in the greatest savings. Because you’re paying down both interest and principal while you’re still in school, you’ll already have made a good start on repaying your loan by the time you graduate. The drawback to an immediate repayment plan is that for many students, it’s not realistic to make full monthly payments while still enrolled in college.

If you choose an interest-only repayment plan, your monthly payments will be smaller, and your loan balance won’t grow while you’re in school. It won’t get any smaller, either, but at least you won’t be in for a surprise when it’s time to start making full payments.

A partial interest repayment plan lets you pay a fixed amount — say $25 or $50 a month — that doesn’t take care of all the interest you owe, but does keep your loan balance from growing too quickly. Choosing this plan can be a relatively painless way to keep your loan balance in check, and reduce the total amount repaid.

A full deferment plan lets you put off worrying about repaying your student loans altogether until you’re out of school. Some lenders offer a six-month grace period after you graduate before payments are due. But in the mean time, interest keeps piling up, and your loan balance keeps growing.

The chart below shows how deferring payment on a $10,000 loan can add $4,000 to $8,000 to the total amount repaid.

Cost to repay $10,000 fixed-rate student loan over 10 years

Plan APR Monthly payment (post graduation) Total repaid
Immediate repayment 5.75% to 11.24% $109 to $137 $13,047 to $16,386
Interest-only repayment 5.75% to 11.24% $110 to $139 $15,472 to $21,187
Deferred repayment 6.49% to 11.49% $144 to $204 $17,270 to $24,539

Source: Citizens Bank. Monthly payments are post graduation and vary according to the annual percentage rate rate of the loan.  

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