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Paying Off Those Student Loans

How the Repayment Process Works

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dollar Photo courtesy of David Siqueira, Stock.Xchng Photos

Happy graduation! Er, now about those student loans...

If your college kid has funded any portion of his college education with student loans - a Perkins, Stafford or other loan - the repayment clock starts ticking six to nine months after graduation. That may seem like a long time away, when you're busy sipping champagne and contemplating that impressive new diploma. But repayment time rolls around quickly. Here's how it will work:

The Letter

A letter will arrive from the federal Department of Education announcing that that student loan is about to come due. Stafford loan repayments begin six months after graduation (or dropping out); Perkins begin nine months after graduation. The letter may arrive at your home, if that's your 20something's permanent address, or his apartment. He'll likely also receive an email reminder.

The Payments

The repayment schedule is broken out into monthly payments that include interest (which varies, depending on the type of loan) plus principal, over a period of years. A Perkins loan, for example, can be repaid over 10 years. That's the upside.

The downside is that the interest adds up, so if you pay that way - minimum payments month after month after month - by the end, you'll have paid considerably more.

So, your child can accept the monthly terms or opt to pay the loan off sooner. Either way, the loan mechanism makes it easy to set up an automatic withdrawal or bill-pay plan. This, of course, assumes that he's got a job and can make the payments.

Ahh! No Job!

There are several loan payment adjustments that can be made if - IF! - your new graduate is on the ball and arranges them before he starts missing payments. For example, he can defer payments for a period of time, or arrange for a graduated repayment schedule - which starts out with lower payments and gradually increases them. There have been several developments over the last several years. The Income-Based Repayment (IBR) plan, which began in 2009, takes low earnings into account when it sets the dollar figure on federal student loan payments. New graduates - from the class of 2012 and beyond - also may be able to take advantage of Pay As You Earn (PAYE), which forgives any remaining debt after 20 years of payments. The federal student aid site has more information on deferrals, and on the graduated and income-based options.

Need more help? CliffsNotes, the same people who do those quickie summaries of "Grapes of Wrath" and "The Scarlet Letter," have published a terrific book on student loans called "Graduation Debt: How to Manage Student Loans and Live Your Life."

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