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Education Student Loans

By: EconomyWatch Content Date: 31 December 2009

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Education student loans help to conveniently manage the high expenses associated with obtaining a reputable college degree. The inconvenience only arises at the time of student loan repayment. However, with proper research and planning, one can easily avoid the pitfalls pertaining to loan repayment and the possibility of a debt trap.

Education Student Loans: Tips for Optimization

Follow these simple strategies to avoid additional interest payments and protect credit rating:

Pick the Appropriate Repayment Option

The standard duration of a student loan is 10 years. However, student loan borrowers can choose to extend their repayment period, considering their present and anticipated income. Extending the repayment period helps lower the monthly payments, albeit the total debt obligation increases. Common loan repayment plans are:

Income-based plan: The monthly repayment size increases with an increase in income.
Graduated payment plan: The monthly payment during the initial years is very low. The monthly repayment amount increases periodically, generally every two years.

Enquire about the Grace Period

Different loans, federal as well as private, have different grace periods. A grace period is a predetermined period after graduation, when a borrower is exempted from making payments. The higher the grace period, the more effectively one can plan for and accumulate funds towards student loan repayment. Generally, an education loan grace period is six months.

Manage Student Loans Diligently

Ignoring student loan payments can be detrimental to one’s credit rating, and may have long-term repercussions. A default generally takes place after nine months of non-payment. When in danger of default, a borrower must negotiate the terms of repayment, which includes shifting to a more flexible repayment plan. Other strategies for managing student loans are:

Lower the principal: When making a student loan payment, late fees (if any) and interest are written-off before reducing the principal. Hence, one must strive hard to make more than the predetermined monthly payment for lowering the principal. This, in turn, reduces the amount paid as interest.
Pay-off expensive loans first: Holders of multiple student loans must primarily pay off the loan with the highest interest rate. Also, holders of both federal and private education loans must start with repaying the private loan, since they tend to have higher interest rates and lack flexible repayment options.

Finally, consider student loan consolidation for optimizing education loans. A student consolidation loan merges multiple loans into a single monthly payment, with a fixed interest rate. This helps avoid late payments and delinquencies.