Education Loan Payment

By: EconomyWatch Content   Date: 23 November 2009

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Education loans are an important mode of financing for students who lack sufficient funds, unable to obtain scholarships or assistance from individual sponsors. However, education loan payment is an intricate task, which could lead to damaging of the individual’s credit rating if it is not carried out appropriately.  

Education Loan Payment: Options

Private lending institutions offer a wide array of education loan payment options, depending on the nature and amount of the loan.

A student can select from the following payment options:

Standard repayment plan: This education loan payment option requires a student to make monthly payments for a specified period, wherein the size of monthly payments are higher than other plans. However, the net payment (principal plus interest) tends to be lower due to the low interest rates offered in the plan.

Income-Based repayment plan: This plan is best suited for individuals having low or unstable incomes. They may be working in an "income-sensitive" domain. The size of their monthly payments under this plan is directly related to the income earned by the individual. Typically, the amount of payment is refigured annually, according to the applicant’s annual income, loan amount and household size.

Graduated repayment plan: Under this plan, the monthly payments are low during the initial years. This continues increasing gradually during the duration of the loan. Generally, any increases in the monthly payments take place once in every two years. This is an ideal alternative for students having a fresh start in the industry, as the increase in payments is often complemented with an increase in earnings.

Extended repayment plan: This plan enables the student debtor to stretch repayment over a substantial period, which may be as high as 25 years. However, to qualify for the plan, one is required to apply for loan of a sizeable amount.

Some private lenders also enable to combine a graduate payment plan with an extended plan. This reduces the monthly payment obligations, although the overall education loan payment obligation mushrooms. Moreover, some lenders maintain the provision of switching loans to facilitate maximum flexibility for their clients.

Finally, some education loan institutions provide its clients with a forbearance option when they have major financial difficulties. Forbearance enables the debtor to postpone education loan payments or reduce its amount for a specific period to get back on track. However, the clinch is that the interest continues to accrue during this period.


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