Before earning your college degree, one top priority is likely to avoid being saddled with student loan debt. According to the U.S. Department of Education, as of the third quarter of 2021, student borrowers owe nearly $1.6 trillion in student loan debt.
As a high school student, now is the time to learn how to avoid becoming a statistic. Understanding the types of student loans available to you, how interest accrues and what you can expect out of student loan repayment are all important factors to consider before you even borrow a loan. 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. Also available in many cases are 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: available to eligible undergraduates with a proven financial need. The government subsidizes the interest that accrues on these loans while the student borrower is enrolled in school at least half-time and during the loans grace period (more information on the grace period below) and other qualifying periods of deferment.
• Direct Unsubsidized Loans: available to eligible undergraduates and graduate students regardless of financial needs. Student borrowers are responsible for paying all of the accrued interest on unsubsidized student loans.
• Direct PLUS Loans: available to eligible parents of undergraduate students and to graduate or professional students.
Private Student Loans
Private student loans are issued by non-government institutions; for instance, banks, credit unions, and other lenders. The requirements for applying for these types of loans may be more stringent.
They may include a look at your credit history and other financial-related factors. You may have to begin repayment of private loans before you graduate school; this is not typically the case with federal loans.
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
Submit a 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 a FAFSA. The application is free and you may qualify despite your circumstances.
Every year, the FAFSA form usually becomes available online as of October 1 for the next school year. You can easily apply online (see the link in the paragraph, 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
Take the time to research a lender with a good reputation. This could mean that the lender offers flexible repayment options, fees that are reasonable, (or none at all), 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 (if you have one). Applicants with a limited credit history may have the option of applying with a co-signer. 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. More about this below:
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.
Variable-rate loans: these types of loans come with an interest rate that can increase or decrease based on market fluctuations. Private student loans may have either fixed or 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 is riskier than a fixed-rate loan because you don’t always know what the interest rate will be; if you’re not sure of your financial future after graduation, a fixed-rate loan is the more predictable choice.
Student Loan Mistakes to Avoid
1. Failing to Research Your Loans
What it boils down to: make sure you know what you are getting into. Be aware of the consequences of signing for any loan and know what you will be paying on a monthly basis, 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 temptation.
Student loans are intended to pay for qualified education expenses and it’s all going to need to be repaid, with interest. In general, the more loans you have the greater the likelihood of an increased financial burden in the long run. Avoid this by only borrowing exactly what you need, specifically for education-related expenses.
3. Not Having a Plan
Life comes with a long parade of surprises and upsets. The one thing you could have power over is your school loan repayment plan. Know exactly when your student loan repayment plan starts (in some cases, that could be before you graduate), and know exactly what your monthly payment will be.
Be proactive about keeping track of changing interest rates and rising tuition, as well as costs of 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 most 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 leave school at least half-time in which you are not required to make payments. The grace period on federal student loans is typically six months. Private student loans may or may not have a grace period.
The exception to this are Direct Subsidized Loans. As mentioned, borrowers are not required to pay for the interest that accrues while they are enrolled in school at least half-time, during the grace period, and during qualifying periods of deferment.
Also understand that the accrued interest may be capitalized on the loan under certain circumstances, like at the end of the grace period or after periods of forbearance. This is the case for Direct Unsubsidized Student Loans. 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
The terms and conditions for private student loans are determined by the lender, so understand the expectations on interest and when it may be capitalized before borrowing.
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.
As noted above, most federal loans have a six-month grace period, 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.
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Repaying Private Loans
On 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, private loans usually 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.
Some private loans may offer grace periods, but it’s not a common practice.
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 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:
Scholarships do not typically have to be paid back. If you’re not sure where to begin your scholarship search, you could ask your high school guidance counselor for recommendations.
You can also 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 a 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 earlier, 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.
Private Student Loans with SoFi
If you’ve exhausted your federal aid options and still need additional funding, SoFi private student loans and student loan refinances might be a smart solution. Not only is the application process relatively easy and entirely online, but it can also be completed with a co-signer.
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SoFi Private Student Loans
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