When taking out private student loans or refinancing current student loans, many borrowers focus on either the interest rate of the loan or how much their monthly payments will be. This certainly makes sense, as these are two important elements that determine how much a borrower will end up paying back over the life of a loan. However, what most borrowers don’t realize, is the interest rate and expected monthly payments are determined by several factors, including the borrower’s past credit history, current financial situation and future earnings potential, the lender’s costs and desired profit margin, and the loan repayment options the borrower selects.
This article will focus on your loan repayment plan options. This is a key decision you control at the exact time you decide to take out a student loan or to refinance your existing student loans.
When it comes to private student loans and student loan refinancing, a lender may offer more than one repayment plan to choose from. Below are the most common plans you will encounter:
Tip: If a lender offers a choice of repayment plans, they will generally charge a lower interest rate for Standard and Interest Only repayment, and a higher interest rate for Deferred repayment to compensate for the added risk. Choosing to make full principal and interest payments under a Standard repayment plan is the least costly repayment plan available. If you cannot afford to make full principal and interest payments, paying at least some amount each month, whether it is Interest Only payments or Partial payments, will reduce your overall cost of borrowing.
By exploring your repayment plan options, you can find the best option for your current and future expected financial situation. In Part II of Choosing Your Private Student Loan Repayment Options, we’ll discuss interest rates and repayment terms, which will also affect your total amount paid.