Loan Debt and Repayment

Like many students, you may need to take out a loan — that is, borrow money — to cover college costs. The amount of money you owe on a loan or loans is called debt. Before you start applying for loans, think about how much debt you’re able to take on and map out a loan-repayment plan.

Understanding Your Debt Limit

How much debt is too much? Experts suggest these basic guidelines:

  • Students: Advisers suggest that monthly student-loan repayments should not add up to more than 10 to 15 percent of a new graduate's starting monthly income.
  • Parents: Lenders generally advise parents to limit their total debt repayments (including education-loan repayments) to 37 percent of their gross income — the total amount of money they make before taxes and other deductions.

If you think that you are taking out more in loans than you can afford, visit your college’s financial aid office for advice on how to reduce your loan and manage debt.

Repaying Student Loans

Most lenders allow you to adjust repayment terms to fit your needs and circumstances.

Standard Repayment

Most students repay their loans using the standard repayment plan. This calls for regular monthly payments over a 10-year period. Students usually don’t have to start repaying loans until after they graduate from college.

Other Repayment Options

The federal Direct Loan Program offers the following flexible repayment options:

  • Extended repayment: If you qualify for this payment plan, you can extend your repayment period for up to 25 years.
  • Graduated repayment: Under this plan, your payments gradually increase, usually every two years.
  • Income-based repayment: This option ties your repayment amount to your income. It often allows for a longer repayment period.

A Note on Interest

Loan providers charge a regular fee called interest. Interest fees are a percentage of the total amount of money you owe, and you have to pay these charges along with repaying the amount of your loan.

Be careful about choosing to make low or less-frequent payments on your loan. If you go this route, paying off the loan will end up costing more because you’ll be paying an interest fee on a larger total loan amount for a longer time. Consider increasing your monthly payments if you can so you owe less in interest over time.

Repaying PLUS Loans

The federal government offers PLUS Loans to parents of college students to help pay for their children’s education. Parents have some flexibility in terms of when they must start paying back this loan and how they make payments — for example, standard, extended and graduated repayment plans are available.

Loans and Taxes

When calculating the cost of your loan, consider how loans affect your taxes. Students can deduct up to $2,500 per year of education-loan interest payments on their taxes for as long as they hold the loan. Parents who pay for a child’s education can do the same.

See IRS Publication 970, Tax Benefits for Education, for details.

This article is intended for informational purposes and is not intended as tax or financial advice.