Updated: Mar 02, 2021
What to Consider Before Choosing a Repayment Plan
Understand what to consider when choosing a student loan repayment plan with help from Discover Student Loans.
Graduating college marks the beginning of a new chapter, one that involves student loan repayment if you borrowed to pay for your degree. If you have a loan with a cosigner, it's important to discuss your repayment strategy together.
Ideally, the conversation begins well before graduation day, says Dan Evertsz, founder of college planning firm College Money Pros, located in the Bay Area. He says it's also helpful for borrowers and cosigners to have a written agreement about how the loans will be handled after graduation.
"Once you have that discussion, put the terms of repayment on paper," Evertsz says.
But what if you and your student loan cosigner have yet to broach the topic of repayment? If you need a little nudge to get started, these conversation starters can give you an opening for talking about cosigned loans.
The first thing you and your cosigner should discuss together is what you can reasonably afford to pay towards your loans. When you don't have a job right out of college, or you do but you aren't making a lot of money, you may need to ask your cosigner to handle the student loan repayment temporarily.
Talk about how that kind of situation would be handled if you can't pay, but your cosigner can. Specifically, discuss how long they'd agree to pay the loans and whether you'd be responsible for paying them back down the line. And it's good to include this as part of your written repayment plan.
The next thing you may want to talk about is whether you'll share in making payments towards the loans.
Credit analyst Jake Lunduski says he took out approximately $20,000 in private loans to pay for school, which his father cosigned. Together, they came to an agreement on repayment that worked for both of them.
"The conversation was fairly straightforward," Lunduski says, "with the goal of me finding employment and being able to pay as much as possible on the loan monthly after the six-month grace period post-graduation."
Once he found a job, Lunduski's budget allowed him to pay approximately $900 per month towards the loans. His father generously offered a matching payment of $800 per month, allowing them to repay the loans together in about a year.
It's important for you and your student loan cosigner to understand one another's expectations. For example, if you're hoping for a 50/50 split but they expect you to shoulder 100 percent of the debt, that's useful to know as you plan your repayment budget.
Once repayment begins, your cosigner might want some reassurance that you're holding up your end of the bargain by paying on time and as agreed. Your cosigner should have access to paper and/or electronic loan statements so they can track payment activity and balances. Even so, you may want to consider taking the following additional steps:
Having this discussion helps you stay accountable for the loans and your part in repaying them. Your cosigner may also value the reassurance of knowing that you are on top of payments as well as being able to easily access information about the loans.
Refinancing could allow you to pay off the existing loans by applying for a new loan in your name only. Additionally, it could simplify repayment if you have a single payment to make each month. Refinancing may also lower your monthly payment and interest rate. If the loan repayment period is extended, however, that could increase the total cost of the loan, in terms of interest paid.
The caveat with refinancing a loan is that you'll generally need a good credit score for approval. If you're just getting started with building credit, it may take a year or two to get your score in shape to qualify for refinancing.
Cosigner release is something else you may discuss if your lender offers that option. A release keeps your loan terms the same, it just removes your cosigner's name from the loans. But for this too you'd need to work on your credit score since your lender may use credit history, along with your income and expenses, to decide if you qualify for cosigner release.
Lunduski says there may be additional requirements from the lender to secure a release. For instance, it's typically a requirement of private lenders that a stated number of consecutive payments be made before a release is granted.
In a perfect world, this would never happen but life doesn't always go according to plan. When neither you nor your cosigner can pay, the consequences may include damage to both your credit scores stemming from late payments, not to mention late fees, and penalties that could accumulate on the loan.
Evertsz says talking about this possibility can be a difficult subject to tackle but it's important to ensure that you have a plan in place for just this type of contingency.
Start by reaching out to the lender to discuss repayment options that might be more accommodating to your budget. Private lenders may offer alternative plans with a reduced monthly payment, although these may only be granted on a case-by-case basis.
If you and your cosigner can't pay anything at all, a deferment or forbearance may be something to consider if your lender offers those options. Both would allow you to temporarily put payments on hold.
But be aware that interest continues to accrue on the loans during a deferment or forbearance, which could inflate what you owe. You may want to factor in how that might affect your payments and your budget once you're ready to begin repaying the loans.
Ideally, your student loan repayment plans go off without a hitch, but discussing the worst-case scenario can help prepare you — and your student loan cosigner— if you encounter any challenges along the way.