Repayment of Subsidized Student Loans

There are many different ways to pay for college. Some students are fortunate enough to get help from relatives or to have saved up money for college in a 529 plan or other college savings vehicle. But, for many students, covering the entire cost of attending college or a university requires taking out a loan.

Student Loans are guaranteed by the Federal Government. If the student defaults and the loans are not repaid, the government reimburses lenders, like banks, for their losses. In order to qualify for these loans, the student must apply for financial aid through their university or college by submitting a financial aid application.

Known as FAFSA, the information provided on the application determines what kind of student aid one can get. Some financial aid, such as Pell Grants, do not need to be repaid. Other forms of financial aid, like loans, must be repaid by the student, or in the case of some PLUS loans, by the parents.

There are two main types of student loans issued by the US Department of Education. The first kind of student loan is an unsubsidized student loan. These loans accrue interest from the time they are disbursed (paid out). However, payments are not required on student loans while the student is enrolled for a minimum number of hours. That means that the balance owed on unsubsidized loans will be higher than the original loan amount if the student does not make interest payments while in school.

The second type of student loan is called subsidized student loans. Subsidized student loans are so named because the government subsidizes the cost of interest while the student is enrolled at least half-time at an approved college or university. This means that even if the student makes no payments while in school, the loan balance upon graduation will be the same as the original loan amount.

Most subsidized student loans repayments are for Stafford Loans. Starting in 2010, all federally backed student loans, including Stafford Loans will only be issued and disbursed by the government. However, students that already have student loans with other lenders will not be automatically changed over to the Direct Student Loan program.

While enrolled in school for either undergraduate studies, or in a graduate program, borrowers are not required to make payments on subsidized Stafford Loans. Once the student graduates, or otherwise drops below half-time enrollment, the repayment grace period begins. The grace period lasts six-months during which time payments are not required to be made, and interest continues to be subsidized. After six-months, the student must begin repaying their loans according to a repayment schedule.

Loans issued through a private lender like a bank must be repaid directly to the bank or financial institution. Many banks will either send monthly statements or a booklet of payment coupons, however, this varies from bank to bank.

Loans issued directly from the government are repaid via the U.S. Department of Education Direct Loan Servicing Center. Borrowers may choose from several different repayment schedules. The repayment plans are Standard, Extended, Graduated, Income Based Repayment (IBR), Income Contingent Repayment (ICR) and Income Sensitive Repayment. Students who do not make a repayment election will be enrolled in the Standard repayment plan, and will be mailed a monthly statement.

Payments can be made by check to the address on the statement, or electronically via the Direct Loan Servicing website at www.dl.ed.gov. Some borrowers may be eligible for a reduction in their loan’s interest rate if they setup an automatic monthly payment online and sign up for electronic billing.

Remember that student loans do count on your credit report and factor into your overall credit score. A history of on-time student loan payments is a major plus, especially for students who are just starting out with a new career and building up credit on their own.