Which Student Loan Repayment Plan is Right for Me?

Which Student Loan Repayment Plan is Right for Me?

Getting an international student loan to study in the USA can be expensive—and confusing.

At eduPASS, we work with international students every day to understand their student loan options. One of the most frequent questions we hear is “which student loan repayment option is cheapest?” The answer is that it largely depends on six factors. Read on to learn more!

The Top Six Factors to Consider When Evaluating International Student Loan Repayment Options

#1: Loan Term

The term of your international student loan is the length of time you have to pay back your loan. The term is usually expressed in months, so a 10-year loan has a term of 120 months.

The shorter your loan term, the higher your monthly payments will be, but the lower your overall cost. The longer your loan term, the lower your monthly payments, but the higher your overall cost.

To illustrate this point, let’s assume you borrow $20,000 at an annual interest rate of 12% (which means the interest charged on a monthly basis is 1%, or 1/12 of 12%). Using a simple loan repayment calculator, you can see that your monthly payment (assuming interest is calculated on a monthly basis) with a 5-year loan term would be $445. (Note: Figures are rounded to the nearest dollar.) Now adjust this to a 10-year term, and you’ll see that your monthly payment drops to $287.

Comparison of Payment Stream for $20,000 Student Loan: 10-Year vs. 5-Year Loan

10-year term5-year term
Monthly Payment (Principal + Interest) $287 $445
Number of Months 120 60
Total Amount You’ll Pay $34,440 $26,700

As the above example illustrates, the 10-year term is a better option if you think you won’t be able to afford a monthly payment of $445, which is what you’d pay with a 5-year term. Most personal finance experts recommend that you spend no more than 10% of your post-graduation income on loan payments. So, if you expect to earn a post-graduation salary of only $3,000 per month, the most you will reasonably be able to pay per month is $300—making the 10-year loan a more affordable option.

However, if you’re an MBA student likely to make, say, $9,000 a month, you should be able to easily afford $445 per month. In that case, you should choose the 5-year option. Why? Because you’ll end up saving over $8,000!

Of course, there’s yet a better option. Most lenders offer no prepayment penalty, which means you could choose a loan with a longer-term but make extra payments and apply these towards the principal when you are able. That will allow you to pay off the loan early and reduce the total amount you pay!

#2: Interest Rate and APR

Most students seeking a loan to study in the USA focus on the interest rate first. Why? Because lower interest rates mean lower interest charges, which means lower payments.

But there’s a catch! Some international student loans have fixed rates, which means the rate will never change. But be aware that if you choose a variable rate loan, you don’t actually know what your interest rate will be over the life of the loan. If you want to learn more, check out eduPASS’s detailed explanation of the difference between fixed-rate and variable-rate international student loans and what it means for your loan payments!

Many international students are less familiar with the term “APR” and don’t realize how important this is. “APR” stands for Annual Percentage Rate, and it refers to the total annualized cost of borrowing, including both interest payments and any other fees. The most common fee with student loans is an origination fee, which is usually expressed as a percentage of the loan amount and compensates the lender for the cost of processing the loan. This fee is often added to the amount the student is borrowing to cover education expenses.

Since origination fees vary by lender, the absolute best way to compare products is to compare APRs. But remember, as discussed above, this is only a reliable comparison if both products are fixed-rate loans!

#3: Lender Discounts

When evaluating lender options, be sure to ask about any discounts for which you may qualify. These could significantly reduce your interest rate and therefore your monthly payments. Be sure to factor any discounts in when using a student loan repayment calculator to estimate future payments!

eduPASS affiliate MPOWER Financing, for example, offers 0.5% interest rate discounts on its fixed rate loans for each of the following: enrolling in autopay, making six consecutive payments while on autopay, and verifying graduation and employment. So, if MPOWER Financing quotes you an initial rate of 11.99% but you expect to enroll in autopay and make six consecutive on-time payments, your rate will go down to 10.99% after six months. Then two years later, when you graduate and get a job, you can apply for the third discount, thereby lowering your interest rate to 10.49%.

#4: In-School vs. Deferred Interest Payments

Many students assume that it’s always best to get an international student loan that does not require payments while the student is in school.

But is that true?

Avoiding in-school payments can certainly be less stressful; it can allow students to focus on their studies without worrying about getting an on-campus job or assistantship.

But the downside is that interest on your loan accrues, which means that all of the interest payments you are deferring are actually added to the balance of your loan, and then you pay interest on that interest…meaning that, the longer you defer payments, the more you owe!

Let’s take that same example of a $20,000 loan at 12% interest and examine two different repayment options: (a) you make no payments while in school for 24 months and then, after graduation, make payments for both interest and principal over a 10-year period, or (b) you make interest-only payments while in school and then, after graduation, make payments for both interest and principal over that same 10-year period.

Comparison of Payment Stream for $20,000 Student Loan: Deferring Payments While in School vs. Making In-School Interest-Only Payments

 Option A: No In-School PaymentsOption B: In-School Interest-Only Payments
Monthly Payment While in School$0$200
Monthly Payment After Graduation$364$287
Total Amount Paid over Life of Loan [Calculated as (Monthly in -school payment x 24 months) + (Monthly after-graduation payment x 120 months)]$43,680$39,240

Why are monthly payments post-graduation higher under option (a)?

Because after graduation, your balance under option (a) has grown substantially. Why? Because in the first month, $200 in interest accrued but was not paid. As a result, your principal balance increased to $20,200. The second month, your interest is now calculated on this new balance, so the interest that accrues is now $202, and your principal balance increases to $20,402. So by the end of 24 months, your balance has risen to $25,395.

In contrast, under option (b), you still owe just $20,000, because no interest has accrued.

As you can see, this makes a big difference when calculated post-graduation monthly payments. So, choosing not to make in-school payments will cost you over $4,000 more on a loan of $20,000!

If you want even more details, check out this blog post on private student loan repayment options from Credible.

#5: Payment Currency

When comparing international student loan options, remember to check the currency in which you must make payments.

If this currency matches the currency in which you expect to be paid after graduation, you will not have any currency risk. In this case, you can more easily forecast whether you will be able to afford your loan payments.

However, if these currencies differ, you will face currency risk. What does that mean? It means that, if the currency you are working in appreciates vis-à-vis the currency in which you will be making payments, you will save money, but if it depreciates you could end up paying more—maybe a lot more!

#6: Ease of Making Payments Across Borders

Currency risk isn’t the only consideration if you are going to be earning money in one currency and paying your lender in another.

You also need to consider foreign transaction fees!

These fees can be substantial, so check to see how the lenders you are considering handle cross-border payments. Some lenders that cater to international students, like MPOWER Financing, have partnerships with companies like Flywire, which allows borrowers to make payments via their mobile phone from anywhere in the world at a fraction of the cost.

The Bottom Line on International Student Loan Repayment Plans

The bottom line is that you need to research all of these factors. Don’t be shy about asking lenders for details. We wish you the best of luck with choosing the right loan repayment option for you!