Student loans can help you finance your college education without paying much interest. However, you don’t want to take on more debt than you can comfortably pay back after you graduate. As of June, 2023, student borrowers owe 1.76 trillion in student loan debt, including federal and private student loans, according to the Federal Reserve.
High school can be a great time to start learning about the types of student loans available to you, how interest accrues, and what you can expect when it comes time to repay any student loans you take out. Read on to learn some of the ABCs of student loans, and how to not let them weigh down your financial future.
Student Loan Types
There are two main categories for student loans: federal and private student loans.
Federal Student Loans
Federal student loans are funded by the federal government. Interest rates are fixed (and comparatively fair) and are set annually by Congress every July. Federal student loans also come with protections like income-driven repayment plans and deferment or forbearance options in the case of life changes, such as sudden loss of a job or other roadblocks to repayment.
The following are the federal student loan options offered:
• Direct Subsidized Loans These are available to eligible undergraduates with a proven financial need. The government subsidizes (meaning it pays for) the interest that accrues on these loans while the student borrower is enrolled in school at least half-time and during the loan’s grace period (more on that below), and other qualifying periods of deferment.
• Direct Unsubsidized Loans These are available to eligible undergraduates and graduate students regardless of financial need. Student borrowers are responsible for paying all of the accrued interest on unsubsidized student loans.
• Direct PLUS Loans These are available to eligible parents of undergraduate students and to graduate or professional students. They are not subsidized by the government.
Private Student Loans
Private student loans are issued by non-government institutions, such as banks, credit unions, and online lenders. The requirements for applying for these types of loans may be more stringent.
Lenders will typically look at the student’s or their cosigner’s credit history, income, and other financial information. Some lenders require you to begin making payments while you are in school, while others allow you to wait until six months after you graduate. Either way, interest typically begins to accrue as soon as the funds are disbursed.
How to Apply for a Student Loan
The process for applying for student loans varies based on whether the loan is private or federal.
Applying for a Federal Student Loan
To apply for a federal student loan, you need to fill out and submit the Free Application for Federal Student Aid (FAFSA®) . Even if you don’t think you’ll be approved for financial aid, it can be worth submitting the FAFSA. The application is free and you may qualify despite your circumstances. The FAFSA also gives you access to federal student loans.
Every year, the FAFSA form usually becomes available online as of October 1 for the next school year. (Note that the FAFSA for 2024-25 academic year won’t be available until December 2023 due to the roll out of a new, more simplified form.)
You can easily apply online (see the link above). Completing the FAFSA determines the combination of federal loans, grants, and work-study you’re eligible for. Some colleges and universities also use information from the FAFSA to determine if you qualify for school-specific financial aid.
Applying for a Private Student Loan
It’s important to take the time to do some research and find a lender with a good reputation that offers competitive rates and terms. Ideally, you want a lender that offers flexible repayment options, reasonable (or no) fees, and will provide helpful customer support if you find yourself having any issues with your student loan payments.
If you decide to apply for a private student loan, you will more than likely have to reveal personal financial details, like your credit history. Since students typically don’t have much, or any, credit history, they often need to apply with a cosigner. That’s someone who will share the responsibility with you of paying back the loan.
In many cases, that cosigner would be a parent or an adult with whom you have a close relationship. Getting a cosigner may increase your chances of getting a better interest rate, which could help you spend less in interest over the life of the loan.
Types of Student Loan Interest Rates
The interest rate on your student loans could have a lasting impact on your future finances. The interest charged is a percentage of your unpaid loan principal — that is, the amount you borrowed. Interest is paid to the lender in exchange for the opportunity to borrow money from them.
You can typically choose from between two types of interest rates: fixed-rate and variable rates.
Fixed-rate student loans: These types of loans offer an interest rate that remains the same throughout the life of the loan. This could give you peace of mind, knowing that the rate won’t change, even if the state of the economy does. Interest rates could fluctuate wildly during the course of your loan, but a fixed-rate won’t be affected. As previously mentioned, federal student loans have a fixed interest rate. Some private lenders also offer student loans with a fixed interest rate.
Variable-rate loans: These types of loans come with an interest rate that can increase or decrease based on market fluctuations. Some private lenders offer student loans with variable interest rates. These are also sometimes called floating-rate loans, because the interest rate can change during the life of the loan.
A variable-rate school loan might start with a lower rate than a fixed-rate loan but keep in mind that your interest rate — and monthly payment — could rise later on. A variable- rate loan can make sense if you plan to pay off your student loan early before rates have a chance to rise too much, expect rates to fall in the future, or you have some wiggle room in your budget in case of rising interest rates.
Student Loan Mistakes to Avoid.
1. Failing to Research Your Loans
With any type of student loan, it’s key to understand what you are agreeing to. You’ll want to make sure you understand what the interest rate will be, what your monthly payment will be, when you’ll need to start repayment, and how you plan to cover that obligation.
2. Borrowing Too Many Loans
It’s nice to be approved and accepted, but too many loans (borrowing more money than you actually need) can lead to a heavy financial burden after graduation. Generally, you’ll want to use any college savings, financial aid, and federal student loans before looking to private student loans (which tend to come with higher interest rates than federal student loans). If you’ll need to take on significant debt to attend a certain school, you might consider choosing a less expensive institution.
3. Not Having a Plan
Life can be unpredictable. The one thing you could have power over is your school loan repayment plan. It’s important that you know exactly when your student loan repayment plan starts (in some cases, that could be before you graduate), and exactly what your monthly payment will be.
It can also be helpful to set up a budget that accounts for all of your college costs, including tuition, books, room and board, food expenses, and anything else related directly to your education. If you budget for it ahead of time, you can help make it easier to use your student loan money wisely.
4. Not Realizing That Interest Continues Accruing
Understanding how and when interest accrues on your student loans is critical. For many student loans, interest will accrue while you are in school and during your grace periods. (A grace period is the period of time after you graduate or drop down below half-time attendance, during which you are not required to make payments.)
With the exception of subsidized federal student loans, interest will continue to accrue even if you are not making payments on your student loan. It will then typically be capitalized. Capitalization occurs when the accrued interest is added to the principal balance of the loan (the original amount borrowed). This new value becomes the balance on which interest is calculated moving forward.
Recommended: Understanding Capitalized Interest on Student Loans
Repaying Your Student Loan
Another important factor is understanding what repayment plans are available to you based on the type of loan you borrowed.
Repaying Federal Loans
For Direct Subsidized and Unsubsidized Federal Loans, students who are enrolled in school at least half-time aren’t required to make payments on their student loans. On these loans, repayments officially begin after the loan’s grace period.
Federal loans typically have a six-month grace period after graduation, which allows you time before you have to start repaying your loans. It’s important to note that even though you may be granted a grace period, depending on the loan you have, you may still be responsible for paying the interest on the loan during the time you are not making payments.
Note that PLUS Loans, which are available to parents of students and graduate or professional students, require repayments as soon as the loan is disbursed (or paid out).
Borrowers with federal loans are able to choose one of the federal repayment plans . These include:
• Standard Repayment Plan On this plan, monthly payments are a fixed amount and repayment is set over a 10-year period.
• Graduated Repayment Plan On this plan, payments start out on the lower end and then gradually increase as repayment continues. Loans are generally paid off over a 10-year period.
• Extended Repayment Plan Payments may be either fixed or may gradually increase over the loan term. Loans are paid off within 25 years.
• Income-Driven Repayment Plans There are four income-driven repayment plans. These tie payments to the borrower’s discretionary income. The percentage and repayment term may vary depending on the type of income-driven repayment plan the borrower is enrolled in.
With private student loans, the repayment terms are determined by the lender. That schedule will tell you exactly when your first payment is due and how much you will owe.
Unlike federal loans, many private loans have to be paid back before you graduate, so be sure to review your agreement closely and know exactly what you are going to need to do. Contact the lender directly if you have any questions.
Recommended: How to Pay Off College Loans
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If Repaying Loans Becomes a Problem
Nobody plans on not paying back their student loans, but sometimes life can throw a few financial punches that you weren’t expecting. A smart strategy if this were to happen to you: face the problem head-on.
Options for Federal Student Loans
If a borrower is struggling to make payments on their federal student loans, they may consider changing their repayment plan. Federal loans, as mentioned, offer income-driven repayment options which tie the monthly payments to the borrower’s income. This can help make monthly payments more manageable for borrowers.
In cases when even income-driven repayments are too much, borrowers may be able to apply for deferment or forbearance. These allow borrowers to pause their loan payments. Depending on the loan type, you may or may not accrue interest during periods of deferment or forbearance.
Options for Private Student Loans
Private lenders are not required to offer the same repayment plans or borrower protections (like deferment and forbearance, mentioned above) as federal student loans. Some private lenders may be willing to work with you during times of financial difficulty so that you can continue making payments. Check in directly with your lender to see what payment plans or options they may have available to you.
A Note on Student Loan Default
After a certain number of missed payments (which can vary depending on whether you have borrowed a federal or private student loan), your loan may enter default. That can have serious financial consequences, such as impacting your credit score.
Declaring bankruptcy generally won’t rid you of your federal student loan obligations. It is extremely challenging to get student loans (federal or private) discharged in bankruptcy.
What to Do if You Don’t Get Enough Federal Loans
It’s never too early (or too late) to begin researching methods of additional funding if your federal loans aren’t going to cover your tuition costs. Here are just a few to consider.
Scholarships do not typically have to be paid back. If you’re not sure where to begin your scholarship search, you might ask your high school guidance counselor for recommendations. An online scholarship search tool can also be helpful.
In addition, you may want to try local community and civic organizations, as well as businesses and religious groups. You can also ask about scholarships in your college’s financial aid office.
You can also try scouting scholarships based on a certain skill or talent: music, writing, sports, and even academics. Qualifying for multiple small scholarships could add up and go a long way toward helping ease your financial burden.
Grants work like scholarships in that you typically don’t have to pay them back. They are often offered by the federal government (and would be part of your federal aid package); in some cases, in exchange for a grant, you agree to work in a certain field for a set period of time after graduation.
Through the federal work-study program, you can earn money to put toward school expenses by working jobs around your college’s campus. If you are approved for the work-study program, it will be included as a part of your financial aid award. Then, you may need to apply for jobs that are part of the program. These jobs may be on- or off-campus.
If you can’t find a work-study job to fit your schedule, there may be other part-time job opportunities available off-campus. You could inquire about part-time work at your on-campus career services office.
Private Student Loans
As mentioned, a private student loan may cover the remaining tuition costs not covered by your federal financial aid package. Qualifying for these loans might require a credit check and your credit history can potentially affect your private loan interest rate. For undergraduates with little-to-no credit applying for private student loans, they may benefit from applying with a cosigner in order to qualify for a more competitive rate.
As another reminder, private loans are not required to offer the same benefits or borrower protections afforded to federal student loans. As a result, most students only consider private student loan options after all other sources of aid and funding have been carefully evaluated.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
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SoFi Private Student Loans
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