Personal Finance

Repayment strategies for your student loans

The party is over for the class of 2013.

Students graduating from college enjoy a six-month grace period before they have to start repaying their loans. But for the latest crop of graduates, that period is now over, and those who have loans are figuring out how to pay them off.

Peter Dazeley | Getty Images

The good news is that these recent graduates have several repayment options. The bad news is that they have a lot to pay: The average amount a 2012 graduate with loans owed at graduation was $29,400, according to the Project on Student Debt, an initiative of the Institute for College Access and Success. How successfully they manage the process can affect their readiness to move on with key financial stages of life, from buying a car to taking out a mortgage and even getting married.

"Every dollar of additional student debt is a dollar less that you have available for other priorities," said Mark Kantrowitz, senior vice president and publisher of, which publishes websites focused on planning and paying for college.

The magnitude of student loans outstanding is staggering. Some 70 percent of the college students who graduated in 2012 from nonprofit schools were carrying student loan debt, according to the Project on Student Debt. In aggregate, students owe an estimated $1.2 trillion on their loans, according to the Consumer Financial Protection Bureau, making student loans the largest form of consumer debt other than mortgages.

(Read more: Student loans fuel $12.3 billion rise in consumer borrowing)

Borrower's options for repaying student loans vary depending on the lender. The terms of private loans are not uniform, but Rohit Chopra of the Consumer Financial Protection Bureau said recently in a blog post that "we've received thousands of complaints from private student loan borrowers. The most common complaint comes from those who are unable to negotiate a repayment plan that they can actually afford." The bureau has also found that private loan servicers don't always act in borrowers' best interests when they are repaying loans.

(Read more: Student loan borrowers face payment 'pitfalls')

Government loans offer a number of repayment options, outlined on government websites like The standard option is straight repayment, which will extinguish borrowers' debt in 10 years if the amount they owe at graduation is less than their starting salary after college.

If that seems too onerous—for example, if a borrower has landed a low paying job, or is living in an extremely high cost area—he or she can opt into some form of an income based repayment plan. Those plans extend payment time by reducing monthly payments, but there is a catch: Because the loans are outstanding longer, the interest the borrower owes gets higher. Kantrowitz estimates that a student with a loan at 6.8 percent interest who extends the term from 10 years to 20 would cut monthly payments by a third, but ultimately pay more than twice as much in interest.

Another option is graduated repayment, where the initial loan payments are smaller than those later on, and the loan being paid off in 10 years. This is a useful option for someone who has a low starting salary but expects it to increase quickly.

A borrower who has more than $30,000 in debt can opt for extended repayment and take up to 25 years to pay. But as with the income-based repayment plan, taking longer to pay off the loan means greater total interest payments over the life of the loan.

Some borrowers in duress opt for forbearance, especially if they can't qualify for a simple deferment of their loan payments. But neither of these options is exactly a repayment plan. A deferment may mean that the lender may pay the interest on your loan, so your balance won't balloon when you resume payments. In forbearance, though, the interest keeps piling up.

"Forbearance is a very costly way to try and manage debt," said Lauren Asher, president of the Institute for College Access and Success.

Student loans weighing down on millennial 401(k)s
Student loans weighing down on millennial 401(k)s

Student loan borrowers also receive loan counseling before they graduate from college. In addition, the federal government is starting to actively reach out to students to explain repayment options. With all this support, it's logical to think that delinquencies and defaults should be shrinking. But in fact, student loan default rates rose steadily from 4.6 percent in 2005 to over 10 percent in 2011, according to the federal data.

(Read more: Surging student loan debt is crushing the system)

Justin Draeger, president of the National Association of Student Financial Aid Administrators, thinks he knows why. The counseling sessions aren't reaching a key cohort of borrowers, he said, and those borrowers may be less motivated than most to repay their loans.

"The majority of people who are defaulting have characteristics in common: They have dropped out or stopped out of school. They probably didn't go through the counseling that's available to them" before graduation, he said. "They may not be as vested in repaying their student loans because they feel they didn't get the education they deserved."

Then, too, some so–called debt relief firms mislead some borrowers, according to a report by the National Consumer Law Center.

(Read more: Student loan 'debt relief' firms mislead, report finds)

Even students who do finish college and receive regular counseling from their financial aid office may not be completely on top of their loan repayment options and responsibilities, said Scott Juedes, Wellesley College's director of financial services. His office provides ongoing information to students with loans, on top of the counseling required by the federal government. But even that may not do the trick, he said. "Some students have loans at multiple lenders. There is not an easy way to track them."

Juedes has personal experience with the complexity of student loans. His spouse has a variety of loans outstanding, and even when the two of them are trying to sort out their options together, "it's still incredibly difficult to figure out which repayment option is best," Juedes said.

It's a safe bet that newly minted college graduates are likely to have a tougher time with the process than a college financial aid officer. But Juedes says that staying organized and on top of your loans, considering your options in light of your chosen career path and probably income will help.

"I do think colleges have a responsibility to make it a clear and concise and transparent process," he said. "There are things that we can do in terms of financial literacy and improving skills. But at the same time, I'm not sure it's an issue that only colleges can tackle themselves."

—By CNBC's Kelley Holland. Follow her on Twitter @KKelleyHolland.