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When you take out a private student loan, you’ll typically have a choice of several repayment plans. The repayment plan you choose can have a big impact on not only your monthly payment, but how much interest you’re charged over the life of your loan.
In this post:
- Private student loan repayment options
- How much you can save by making payments in school
- How much you can save by choosing a shorter repayment term
- Choose a repayment plan based on total borrowing
Private student loan repayment options
There are four common repayment plans for private student loans, although not all lenders offer all of them:
The important thing to remember about each of these repayment plans is that interest starts accruing as soon as your student loan is disbursed (that’s when you or your school receive the funds). If you’re not at least paying the interest that you owe each month, your loan balance will grow while you’re in school.
Immediate repayment plan
An immediate repayment plan means you make full monthly payments while still in school.
Cons: 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.
Interest-only repayment plan
When choosing an interest-only repayment plan, you’ll pay only the interest on your loan while you’re still in school.
Cons: You won’t make any headway paying down your loan balance while you’re a student. But at least you won’t owe more than you borrowed when it’s time to start making full payments.
Partial interest repayment plan
With a partial interest repayment plan, you’ll make a fixed monthly payment while still in school that only covers part of the interest you owe.
Cons: You’ll still owe more than you borrowed when you graduate, but your loan balance won’t grow as quickly.
Full deferment
If you choose full deferment, you pay nothing while you’re enrolled in school. During this time, though, your loan balance grows.
Cons: Interest charges pile up while you’re in school, and your loan balance keeps growing.
How much you can save by making payments in school
Making full or partial loan payments while you’re in school can save thousands of dollars in interest. That’s because unpaid interest that accrues while you’re a student is capitalized, or added to your loan balance, when you leave school.
| Plan | APR | Monthly payment | Total repaid |
|---|---|---|---|
| Immediate repayment | 6.23% to 11.74% | $111 to $139 | $13,323 to $16,710 |
| Interest-only repayment | 6.23% to 11.74% | $112 to $142 | $15,953 to $21,730 |
| Deferred repayment | 6.21% to 10.86% | $144 to $211 | $17,231 to $25,327 |
| Source: Citizens Bank. Monthly payments are post graduation and vary according to the annual percentage rate of the loan. Calculations assume borrower is enrolled in school for 45 months and takes advantage of 6-month grace period. | |||
The table above shows that making full, immediate payments on a $10,000 loan as soon as you take it out can save more than $8,000 in total repayment costs. The higher the interest rate on your loans, the bigger the savings.
Choose a shorter repayment term and save
The repayment term is how many years of full monthly payments you’ll make before your loan is paid off. Picking a shorter repayment term can not only get you a better interest rate, but you’ll pay less in total interest because you’re paying down principal faster. The tradeoff is that the shorter the repayment term, the higher your monthly payments.
- The standard repayment term on private and government student loans is 10 years
- Some private lenders offer shorter and longer repayment terms — 5, 7, 15 or 20 years, for example.
| Repayment term | APR | Monthly payment | Total repaid |
|---|---|---|---|
| 5 years | 4.72% to 11.45% | $187 to $220 | $13,134 to $17,760 |
| 10 years | 6.23% to 11.74% | $112 to $142 | $15,953 to $21,730 |
| 15 years | 6.45% to 12.04% | $87 to $120 | $18,209 to $26,462 |
| Source: Citizens Bank. Monthly payments are post graduation and vary according to the annual percentage rate of the loan. Calculations assume borrower makes interest-only payments while in school for 45 months and during 6-month grace period. | |||
The table above shows that paying a $10,000 loan off in 5 years instead of 15 can save nearly $9,000 in total repayment costs. The savings are magnified for borrowers with higher student loan interest rates.
Important: Pick a plan based on how much you need to borrow
With private student loans, it’s important to choose a repayment plan based on the total amount you expect to borrow, because you’ll probably be living with the plan you choose until you pay off or refinance your loan.
The monthly payment on the loan you take out as a freshman may seem manageable — but remember that you’ll probably borrow each year you’re in school.
Learn More: 11 Strategies for Paying Off Your Student Loans Faster
