Student Loans 101
There’s no doubt about it, college is more expensive now than it’s ever been. Affording a 4+ year college degree leads many students to invest in their futures by taking on debt. As with any other debt, it’s important to understand exactly what you’re getting into before borrowing. Once you’re done with school, being able to successfully manage your debt can affect your future finances for years to come.
Student loans come in various forms from different sources. Federal student loans are “public loans” that are funded by the government and have their interest rates determined by Congress. The rates will vary based on the type of loan you’re seeking as well as the degree you’re seeking. There are federal student loans available for undergraduate students, graduate students, and parents borrowing on behalf of their children.
Federal student loans can be subsidized, meaning that you won’t pay interest on them while you’re in school, in the grace period, or while the loan is in deferment. The government elects to pay the interest for you based on your individual financial need, and only undergraduate students are able to get subsidized loans. To begin the application process for these types of student loans you’ll need to fill out the Free Application for Federal Student Aid (FAFSA) each year in order to determine how much you’re eligible to borrow.
Unsubsidized loans are available to both undergraduate and graduate students. The interest on these loans accrues while you’re in school and you can choose to pay it as you go or roll it into the balance of the loan. You won’t have to qualify for these loans based on your financial need, however.
Students also have the option to turn to private lenders for student loan funds. Applying for a private student loan is similar to any other loan application. When you apply for the loan, your lender will determine how much you’re able to borrow based on your credit scores, credit history, and your ability to repay the loan. They will also decide what interest rates you qualify for and whether it will be a fixed or variable rate loan. If you don’t have a very strong profile lender may ask you to have a co-signer or guarantor.
In general, federal student loans carry lower interest rates, have more payment flexibility, and are easier to secure than private student loans. If you find that you’re not able to receive enough financial aid to cover all your college expense, however, private loans can help you to fill in the gap.
When the time comes to pay back your student loans, federal student loans have more options for you, including loan forgiveness programs if you take a qualifying public-service position after graduation. There are deferment and forbearance options to delay, defer, or halt your loan payments in the event of financial hardship. There are also a few different repayment options that are based on your income and ability to make payments:
- Graduated repayment allows for lower payments initially (when you’re just out of school and your earning potential isn’t at its peak) that increase over time (hopefully as your earnings increase).
- Extended repayment allows you to stretch out the repayment timeline to greater than 10 years, usually based on your income situation.
- Income-based repayment plans set a monthly payment amount based on what you earn.
It’s important to note that you’re likely to pay more in each of these scenarios because interest continues to accrue on the entire balance even though your payments may be more manageable.
Student loans can be refinanced as well as consolidated in the future if need be. When federal student loans are refinanced, it’s typically by a private lender. This may mean giving up some of the payment flexibility and hardship protections in an effort to secure better rates or terms. Consider this carefully when looking into refinance options. If you have several federal student loans, you can consolidate them into a single monthly payment (usually with an interest rate that’s a weighted average of the individual loan rates). While convenient, this does prevent you from selectively paying the individual loans down at different paces.