Student loans will introduce you to college, but they also entail very severe long-term commitment. If you're a potential college student or a parent assisting your child in making financial choices, learning what you need to know about student loans before enrolling is key. With higher tuition fees and convoluted borrowing arrangements, blindly taking on student loans without a clear plan can put you in years of financial hardship. With this guide, we demystify student loans, from repayment terms to FAFSA, federal loans, private loans, and deferment—leaving you with a clear idea of what you're in for and how you can go through it with confidence.
At the center of the student loan universe is a simple dichotomy: federal loans and private loans. Understanding the difference is the first step toward making good financial decisions.
Federal student loans are funded by the U.S. Department of Education. They offer a range of benefits that private loans typically do not, including fixed interest rates, income-driven repayment plans, and loan forgiveness programs. The most common types of federal loans include:
Private student loans are issued by banks, credit unions, or internet lenders. They have variable or fixed interest rates based on your own credit history or that of your co-signer. They don't have the federal safeguards and repayment plans will usually be less favorable.
Be sure to review the terms of repayment and conditions of private loans thoroughly before signing up. Beware of the presence of fees, capitalization of interest, and early payment penalties.
Perhaps the most important part of the student loan process is completing the Free Application for Federal Student Aid (FAFSA). Even if you believe that your family makes too much money to receive aid, filling out the FAFSA is imperative.
Paying off student loans is usually more complicated than taking out the loans. Conditions differ depending on the loan type, lender, and repayment schedule you choose. Knowing repayment conditions prior to borrowing is not negotiable.
Most federal loans give you a six-month grace period after graduation, school leaving, or falling below half-time enrollment before repayment. This allows you time to become employed and financially secure.
Understand when your loan starts to accrue interest. Subsidized federal loans do not accrue interest while in school or in deferment. Unsubsidized and private loans usually begin accruing as soon as you receive them.
Federal loans have 10 to 30-year terms based on the repayment plan. Private loans are usually 5 to 20 years. A longer term has lower monthly payments but more interest paid in the long run.
Federal loans are more flexible than private loans. Here are your key choices:
With private loans, repayment periods are up to your lender. You usually won't see income-based repayment or forgiveness.
Typical Terms Are:
Always compare lenders and read every term before agreeing to a private loan. Ask whether they have any flexibility if you fall on hard times.
If you're having short-term financial trouble, deferment and forbearance allow you to suspend or temporarily lower student loan payments.
This allows you to suspend payments temporarily without having to pay interest—but only on subsidized federal loans. Qualifying events are:
Forbearance actually allows interest to accrue on most types of loans, whereas deferment doesn't. It's easier to qualify for but is more expensive in the long term.
These are temporary alternatives. You must not use them as permanent options.
If you learn how student loan interest functions, you can save thousands on the life of your loan.
Unpaid interest can be capitalized, or added to your principal, if not paid. This makes you owe more and pay higher interest in the long run.
To reduce interest:
If you're a public service professional, you can be eligible for Public Service Loan Forgiveness (PSLF) after 10 years' worth of payments on an IDR plan. Teachers, non-profits, and government officials are typical qualifiers.
Always check federal resources to determine if you qualify before entering into a lengthy repayment program.
It’s tempting to take the maximum loan amount offered, but more debt means more pressure post-graduation. Use these tips to borrow wisely:
Simply avoiding common mistakes will help you stay ahead of your loans from the beginning.
What you should know about student loans before enrolling goes far beyond merely knowing about the types of loans.You have to consider your potential future job options, school costs, interest rates, repayment plans, and deferment options to make the best choices for yourself. Investing in education is only worth the investment if you use it responsibly. Your decisions today will have an impact on your own financial situation for decades. Take advantage of federal protections, understand how your package will be impacted by FAFSA, and compare all of your options before you sign an agreement.
With the right information and planning, student loans are not shackles around your ankles - rather, they can be a mechanism to help plan for a better tomorrow, that is, prudent and sustainable.
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