Repaying Your Student Loan

Getting the loan is only one half of the equation. The loan also must be repaid at some time unless your child qualifies for some forgiveness or debt discharge (explained later).

Generally, a federal student loan is repaid in fixed monthly amounts of at least $50 per month over a fixed period of time (as long as 10 years). The time your child has to repay the loan depends on how much she has borrowed. Obviously, the shorter the repayment period, the lower her total interest payments will be. She always has the option of paying her loan more quickly, or paying it off in full, whenever she chooses. This will limit her total interest payments.

She may be eligible for an extended repayment plan that may give her up to 30 years to repay. While monthly payments will be smaller under this alternative, total interest will be greater.

She also may be able to opt for a graduated repayment plan, under which payments increase every two years. Presumably, because payments start out small, her increased earning ability over the years will make it easy to manage payment increases as they come along.

There's also an income contingent repayment plan that modifies required payments according to your income each year, for up to 25 years. If there's still principal unpaid at the end of 25 years, it's discharged (but this discharge is treated as income to the borrower, resulting in income taxes on the discharged amount).

Your child can change repayment plans if his circumstances warrant a change.

Instead of repaying her loan, your child may be eligible to have some or all of it discharged so that she doesn't have to repay it. If she undertakes certain work in certain locations, she may qualify for debt discharge. For example, if she agrees to teach on an Indian reservation for a certain length of time or provide nursing in an economically depressed area, she does not have to repay her student loans. What's more, unlike most other debt forgiveness, this debt forgiveness isn't treated as income that she'd otherwise have to pay tax on.

There's a way for you to borrow money to help your child and cut your repayment costs. Look for a loan that will be sold to the Student Loan Marketing Association (Sallie Mae, for short). Sallie Mae rewards those who make prompt repayment. If you do so for the first 24 months, all but $250 of the loan origination fee is refunded. If you do so for 48 months, the interest rate charged for the remaining period is reduced by 2 percentage points. Also allow the credits to debit your bank account for repayment in this case, and you'll receive an immediate reduction of 0.25 percent off the interest rate. You can find a local bank offering loans sold to Sallie Mae by calling 800-891-1387.