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Student loan basics

You vaguely remember signing a piece of paper every year at college registration time. Now that you've graduated, it's all become painfully clear--those pieces of paper were promissory notes detailing your student loan obligations. Your loans aren't going to go away, and you'll want to repay them as quickly and easily as possible. So whether you have a small sum or a small fortune to pay off, you'll want to brush up on some student loan basics.

First, remember the grace period

After you graduate, you'll probably have a lot to think about--choosing where to live, finding a job, renting an apartment. Luckily, you don't have to add student loans to your list, too, at least not for now. Thanks to the grace period built into most student loans, you'll likely get anywhere from six to nine months before you need to begin repaying your loans. This time can allow you to get financially settled (at least partially!) and examine your repayment options before the drudgery begins.

Understand your repayment options

Gone are the days when your only repayment option consisted of fixed, equal payments spread over a 10-year term. Though this is certainly one option, it's not the only one. Because of the increasing number of students who require student loans to finance their education, as well as the increasing amount of their debt, many lenders offer flexible repayment plans to help students manage this large financial responsibility.

  • Extended repayment plan: With an extended plan, you extend the time you have to repay your loan, usually from 12 to 30 years, depending on the loan amount. Your fixed monthly payment is lower than it would be under the standard plan, but again, you'll ultimately pay more for your loan because of the interest that accumulates under the longer repayment period. Note: Many lenders allow you to combine an extended plan with a graduated plan.
  • Income-based repayment plan: With an income-based plan, your monthly loan payment is based on your annual income. As your income increases or decreases, so do your payments.

To pick the best repayment option, you'll need to determine the amount of discretionary income that you have to put toward your student loan each month. This, in turn, requires you to make a budget and track your monthly income and expenses.


Consider a deferment, forbearance, or loan cancellation if you can't pay


  • Cancellation: With a cancellation, your loan is permanently wiped off your list of financial obligations. It's not easy to qualify for a cancellation, though. Situations when this may be allowed are the death or permanent total disability of the borrower, or if the borrower takes a job teaching needy populations in certain geographic areas. Typically, student loans can't be discharged in bankruptcy.

Remember, these things are never automatic. You'll need to fill out the appropriate application from your lender, attach any supporting documentation, and follow up to make sure that your application has been processed correctly.

Keep track of your paperwork

If your idea of organization is stuffing your random assortment of student loan papers into your sock drawer, think again. Repaying your student loans is a serious matter, and you'll need to stay on top of it. It's important to keep accurate, accessible records. Open a file folder for each loan, and file any accompanying paperwork there, such as copies of promissory notes, coupon booklets, correspondence from your lender, deferment and/or forbearance paperwork, and notes of any phone calls.

Investigate the student loan interest deduction

In 2014, you may be able to deduct up to $2,500 of the interest you paid on qualified student loans. The deduction available to you is dependent on your filing status (such as single or married filing joint) and you modified adjusted gross income (MAGI). There are a couple of hurdles, though. For example, you must have incurred the loans when you were at least a half-time student, and you can't take the deduction if you're claimed as a dependent on someone else's tax return.

If you paid $600 or more of interest to a single lender on a qualified student loan during the year, you should receive Form 1098-E at tax time from your lender, showing the amount of student loan interest you've paid for the year. For more information, see IRS Publication 970.