Money Essentials

Repaying student loans after graduation

Good behavior when it comes to paying student loans can save you dollars and cents


As heavy a burden as student loans are to repay, there are five ways to lighten the load, or at least make it more manageable:

1. Pay regularly and on time.

If you direct your bank to transfer payments electronically from your checking account, many lenders will trim a quarter point off your rate.

2. Ask about alternate forms of repayment.

If you have difficulty meeting your payments, ask about alternate repayment plans. Assuming your salary will go up over time, you can arrange a graduated repayment plan. You begin with a low monthly payment that slowly rises over a period of 12 to 30 years, depending on the size of the loan.

If your income fluctuates because you're self-employed, you can also set up an income-sensitive or income-contingent repayment plan. As your income rises and falls, so does the amount you owe. Under the income-contingency plan available through the Department of Education for direct-loan borrowers, any balance remaining after 25 years is forgiven, although the amount forgiven will be taxed as income. One caveat: Alternate repayment plans will cost you more in interest because you'll pay back your loan over a longer period of time.

3. Take advantage of tax breaks.

The federal government offers relief for taxpayers with student loans. Presuming your income makes you eligible, you may deduct the interest you pay up to a maximum of $2,500 a year. The income limits to qualify for a full or partial deduction are less than $70,000 annually for singles, and less than $145,000 for couples filing jointly.

4. Consolidate your loans.

If you have more than one loan, you can consolidate them. That means a new interest rate is applied to your outstanding principal. The rate will be equal to the weighted average of all your loans but will not exceed 8.25%, a law in effect until at least June 30, 2010. If, by consolidating, you lengthen the term of your repayment, that can substantially increase the total interest you will pay.

5. Seek deferments or forbearance, if you need to.

If you've exhausted your options and can't get relief, you may be able to suspend your payments temporarily. If you lose or quit your job, or return to school, you can ask your lender to temporarily defer your loan payments. If you get a deferment for a subsidized Stafford loan, the government will actually pay the interest that comes due during your suspended payment period.

If you can't get a deferment, you can still hold off on payments for up to a year by asking for forbearance. The interest will continue to accrue, but you avoid defaulting and getting a nasty strike on your credit record. Top of page

calculator
How much will you need for college?
glossary
Glossary
take the test
Take
the test
more lessons
More Money Essentials
lessons
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
15 top executives with $1 salaries Some CEOs and founders agree to salaries of just $1 a year. But once goodies like bonuses and stock options are added in, some of those executives end up taking home many millions of dollars a year. More
Mercedes SL65 AMG: 621 horses of topless power Turn heads as you blow by traffic in this roadster convertible from Mercedes. More
Where the middle class is most unequal CNNMoney looks at the five states with the biggest differences in middle class incomes. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.