If you’re a high-school student looking to finance your college education, now is a good time to start learning all you can about the sometimes complicated world of student loans.
Before earning your college degree, one of your biggest priorities is to avoid being saddled with student loan debt—which you probably already know is a huge problem in this country. In fact, student loan debt for graduates in 2018 averaged $29,800 .
That amounts to over $1.5 trillion in total student loan debt. If you think Americans with credit card debt is a huge problem (it is), student loan debt exceeds that by $694 billion .
As a high school student, now is the time to learn how to avoid becoming a statistic. 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 Loans: federal loans are funded by the federal government. Interest rates are fixed (and comparatively fair) and set annually 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.
• Direct Unsubsidized Loans: available to eligible undergraduates and graduate students regardless of financial needs.
• Direct PLUS Loans: available to eligible parents of undergraduate students and to graduate or professional students.
Private 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
Applying for a Federal Student Loan
Submit a Free Application for Federal Student Aid (FAFSA®) . Go ahead and submit this app even if you don’t think you will be approved. 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 loans, grants, and work-study you’re eligible for.
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). It’s also likely that you may be asked to apply 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 save you thousands of dollars in the long run. More about this below:
Types of Student Loan Interest Rates
Getting a student loan with a low interest rate will be an important factor in how your future finances could be affected. The interest charged to you is a percentage of your unpaid loan principal—that is, the amount you borrowed. You pay interest 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.
Variable-rate loans: these types of loans come with an interest rate that can increase or decrease based on market fluctuations.
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, you may want to stick with a fixed-rate loan.
Note that all federal student loans come with fixed-interest rates. You will always know your interest rate throughout the life of the loan because that rate will not change.
Student Loan Mistakes to Avoid
Failing to research your loans. Notice how we placed this first, because this could be the most important mistake to avoid. 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.
Taking out 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.
Know that for every trip you take or device you buy with that money that’s supposed to be allocated for school-related expenses, you’re going to still have to pay it back, 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.
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.
Then you can plan how you are going to earn the money to pay back your loan without drama. 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.
Not realizing that interest keeps accruing. Even if you are graced with a grace period, the interest you are charged for your federal or private loans may still accrue. The sooner you start making payments in general, the better it can be for you and your financial future. Think of it like this: prolonging your repayment prolongs your eventual financial freedom.
Repaying Your Student Loan
Repaying Federal Loans
Stay in school at least part-time and in most cases you won’t have to start repaying most federal student loans until after graduation. The exception to this rule: PLUS Loans, which require you to start your repayments as soon as you receive the entire loan amount.
Most federal loans have a six-month grace period, which allows you time before you have to start repaying your loans (remember that PLUS Loans do not offer grace periods).
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.
Repaying Private Loans
Take out a private loan and you will receive a repayment schedule from 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.
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. Don’t ignore it, because it won’t go away.
If you default on a school loan, that can spell trouble for your financial future, when you apply for credit cards, or buy a car or a house. Defaulting can destroy your credit rating, and it could take years of your life to fix.
Declaring bankruptcy won’t rid you of your federal student loan obligations. You’ll still be on the hook and you’ll be required to submit a whole new set of paperwork.
Before it even comes to this, it can’t hurt to explore the options you may have for repayment now. For instance, if you have a federal loan, you may be eligible to switch to an income-driven repayment plan that can create a more affordable repayment options for you.
Private loan servicers may not want to take the loss, so they may be willing to work with you to devise a more affordable repayment plan. It’s always worth asking, not ignoring.
Getting a loan deferment for federal or private loans may be an option, but don’t count on it as a sure thing. For example, if you lose your job and you find yourself on unemployment, a loan deferment may put a hold on or reduce your repayments. Know that a deferment is only temporary.
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: 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: 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.
Work-Study: 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 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.
Private Student Loans with SoFi
If you’ve exhausted your federal aid options and still need additional funding, SoFi private student loans might be a smart solution. Not only is the application process super easy and entirely online, but you can also complete it with a co-signer.
As parents often act as co-signers, it may be smart to sit down with them and discuss what student loan options make the most sense for you financially. If you have older siblings who have already started or been through college, they or Mom and Dad are probably great resources for any questions you may have before beginning the student loan process.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.