Repayment Options for Private Student Loans: What Borrowers Need To Know

One in four adults under the age of 40 owes money on student loans, according to an analysis from the Pew Research Center. For many of these borrowers, at least some of their loans come from private lenders rather than from the Department of Education. 

Managing private loan debt is very different from managing federal student loan debt, as you have much less flexibility. You can't change private student loan repayment plans once you've borrowed — unless you refinance — and your options for pausing payments are typically limited.

This guide explains common repayment options for private student loans so you can make informed choices about how to pay off what you owe.

Current private student loan refinance rates

How do private student loan repayment plans work?

Various types of lenders offer private loans, including banks, credit unions, and online lenders. Each lender has its own rules for repayment. Typically, however, you will have a choice of four private student loan repayment plans while you're in school. These include:

• Full repayment: You make payments toward both the loan principal and interest. This is a less common option for students who are still in school and may not have an income.
• Deferred repayment: You make no payments while in school or during your lender's grace period. Interest accrues and may be capitalized, meaning it gets added to your loan balance when you begin repayment. Your principal balance increases as the unpaid interest is added, and you pay interest on top of this interest.
• Fixed repayment: You pay a fixed amount every month while you're in school, such as $25. If this doesn't cover interest, any remaining unpaid interest accrues and is added to your principal balance.
• Interest-only payments: You make payments that cover interest costs while in school, so your loan balance doesn't grow. This results in higher monthly payments while in school but lower total costs over time.

“Deferred loans are more like a federal loan as you don't start repayments until six months after graduation, leav[ing] school, or becom[ing] enrolled as a half-time student,” explains Domenick D'Andrea, financial adviser and co-founder of DanDarah Wealth Management.

When you apply for a private student loan, you choose your repayment term from among the lender's offerings, such as five, seven, or 10 years, although some lenders offer longer payoff times. Once you've decided on your repayment schedule and signed your loan agreement, you're locked in.

“Private student loan repayment plans are structured differently from federal loans, offering less flexibility,” says Ali Zane, chief executive officer of Imax Credit Repair Firm. “They provide a set of repayment plans that borrowers choose from when taking out the loan or entering repayment.”

After school ends and your grace period is over, you'll begin making full monthly payments under the terms you agreed to when you borrowed. Depending on your loan type, you may have a fixed- or variable-rate student loan. This will determine if your payments and interest costs stay the same (with a fixed-rate loan) or can change over time as market rates change (with a variable-rate loan).

Common repayment options for private student loans

Most private student loan lenders offer the four repayment options mentioned above for in-school borrowers. This means you can decide whether to:

• Begin full repayment,
• Defer repayment,
• Pay a fixed amount, or
• Make an interest-only payment.

There's more variation in what student loan repayment options lenders offer for repaying your loans after graduation. For example, a lender providing student loans geared toward borrowers with bad credit may have different loan terms compared with a lender providing loans to highly qualified borrowers.

While it varies by lender, some repayment plan options for private loans you may see include:

• Standard repayment: You'll pay a set amount each month toward your loan. The amount is calculated so you'll pay off your loan in full on the timeline you agreed to. If you have a fixed-rate loan, your payment will stay the same for the life of the loan.
• Graduated repayment: You'll make lower monthly payments when you start repaying your loan, and your payments will slowly increase over time. You'll pay more interest over time with this option since your principal balance doesn't decline as quickly.
• Interest-only payments: Some programs allow you to continue making interest-only payments for a time after leaving school.
• Extended repayment: You'll pay your loan for a longer period than is standard, resulting in lower monthly payments but higher total interest costs.

There's no such thing as an interest-free student loan when you borrow from a private lender. While the Department of Education offers Direct Subsidized Loans that cover interest during school and deferments to undergrads with financial need, there are no private loans that offer this option. So whichever payment plan you select, keep in mind that interest accrues from day one.

Private student loans also lack an important type of payment plan. “Unlike federal loans, private lenders typically don't offer income-driven repayment options,” says Zane.

Refinancing private student loans

If you don't like the terms of the loan you originally agreed to, refinancing private student loans is the only way to change it in most circumstances. Refinancing can make managing private loan debt easier because it allows you to select a new loan with new terms — but you'll need to research your borrowing options carefully.

“You would only refinance current private student loans if you could improve the interest rate and term,” explains Douglas A. Boneparth, certified financial planner and president of Bone Fide Wealth.

Many different lenders offer private refinance loans, however, most require you to meet certain criteria. For example, you typically need:

• Good or excellent credit: Many lenders look for a minimum FICO credit score of 670 to refinance or to qualify for the lowest rates.
• Proof of income: Lenders look at your earnings, as well as your debt-to-income ratio (your debt relative to earnings). You must show that you have sufficient income to repay the loan.

Some lenders also require you to have graduated and earned a degree from an eligible school, so if you dropped out or haven't graduated yet, you may struggle to find a lender.

Once you've qualified for a refinance loan, you use the funds to pay off your current debt and then start making payments to your new lender.

Pros and cons of refinancing private student loans

There are some big advantages to refinancing private student loan debt.

“If the interest rates are lower than when you initially obtained your loan, you could save money on your overall repayments,” explains D'Andrea. “You could also extend the repayment period to lower your monthly payments or consolidate multiple loans into one loan to have one payment.”

However, there are some downsides. D'Andrea points out that your credit score could be impacted by applying for new debt, although any reduction that results from opening new credit can eventually be offset if you make on-time monthly payments. Qualifying without a cosigner can also be a challenge for many recent college grads.

Another disadvantage is that you could end up making your loan costlier, even with a lower interest rate, if you extend the time it takes you to repay what you owe. You'll be trading a longer payoff time and higher total costs in exchange for lower payments now — and this isn't always a good idea.

“The best-case scenario is paying a lower monthly amount for a shorter period of time than your current loan,” says Boneparth.

Deferment and forbearance options for private loans

Deferment and forbearance offer you the chance to pause payments if necessary when you have federal student loans. In some cases, your loan servicer must offer you this opportunity based on your circumstances. If you put Direct Subsidized Loans into deferment, you won't pay interest on them during this time.

With private student loans, lenders can decide if they want to offer a deferment or forbearance program. If your lender offers it, you'll have to apply for it, and it usually lasts a shorter period than federal deferment and forbearance. Interest is typically not subsidized during this time. The unpaid interest will grow and may capitalize.

Tips for managing private student loan repayment

Student loans can feel like a burden, whether you're trying to figure out how to pay off $30,000 or $300,000. The key, however, is to make a plan for how you will repay what you owe while still accomplishing other financial goals like saving for retirement.

Making a budget is typically the best way to get started. Calculate your income and monthly obligations, including rent or mortgage payments, student loan payments, and car payments. Prioritize paying off debt (ideally while investing to build wealth for the future), and make cuts where you can on nonessentials.

Once you've created a budget, set up automatic payments for your student loans. Many lenders offer an interest rate discount for autopay, and you can also avoid forgetting a payment. If you can afford to make extra payments, automate those as well to pay off your loan sooner.

On the other hand, if you become worried about making payments because of financial hardship, let your lender know right away. Find out what options you have before you're late and incur fees and damage to your credit.

The good news is that student loan interest is tax deductible, up to $2,500 each tax year. This can make paying off your loans a little more affordable.