Many careers require at least a two-year degree, and many more require a four-year degree or more. In order to earn a decent living in today’s society, an education is paramount. But the cost of higher education can be tremendous. The average cost of a four-year degree at a public college is $9,970 and the average cost of a four-year degree at a private university is $34,740. Few people can afford to pay that much money over four years without help.
Enter student loans. Student loans are a great way to fund your education. The idea is that you will land a career after graduation that will allow you to easily repay those loans over time. However, it is best to take out only as many loans as is absolutely necessary. Some college graduates find themselves making student loan payments decades after graduation. Don’t borrow an excessive amount as you’ll have to pay it back eventually.
There are a lot of things to keep in mind when it comes to student loans. It is important to understand the types of loans available, how they work, and your repayment options before going into debt. Getting the knowledge up front and first hand is the best way to prepare yourself for this monumental obligation.
How Do Student Loans Work?
Student loans are loans that you take out at the beginning of each semester of school. Each semester comes with at least one loan, depending on your financial situation, the types of loans you qualify for, and the cost of your tuition, books, and fees. You can also use student loans to cover living expenses either on or off campus.
For the most part, student loans do not have to be repaid until you graduate. As long as you are enrolled in a degree program, your loans remain in deferment. This is true of both private and federal student loans. However, with private loans, you may need to make payments on at least the interest before you leave school.
Although most student loans do not require payments while you are in school, this does not mean that you are getting that money for free for four years. In most cases, your student loans will accrue interest throughout the time you are in college, even if you are not required to make payments during that time. Some student loan programs give you the option of either paying the interest each month or capitalizing it and adding it to the principle at the end of your college career.
Student loans almost always have to be paid back eventually. Even though student loans come with some of the lowest interest of all the types of loans available, you can end up paying quite a bit for the privilege of borrowing money for college. Student loan repayment plans usually last a minimum of ten years after graduation, which amounts to quite a bit of interest paid.
There are some programs available for student loan forgiveness or grants to pay off student loans, but these are not available to everyone. You should expect when you take out student loans for college that you will have to repay all of that money, with interest.
Types of Student Loans
There are several different types of student loans, ranging from private to federal. The repayment terms you will have, the repayment options you have, and the loan forgiveness options you have all depend upon what type of student loans you get. It is important to know the difference between these loans.
Private student loans are loans that you get through a private lender or bank. You can get private student loans from local banks or from lenders that specialize in student loans. Some very well known banks such as Capital One, Sallie Mae, Citi Bank, and Wells Fargo deal in student loans, as well as others.
Private student loans vary widely in repayment options and terms. It really depends on the bank that you get the loan from. These private institutions can set their own terms and policies, and the market for private student loans is not strictly regulated. This means that you really have to talk to the bank and ask a lot of questions to know what exactly you are getting into before you take out that loan.
Another important distinction with private student loans is that they are based on credit. This means that not all borrowers will be able to get private student loans. Frequently when private student loans are needed, they are obtained with a cosigner (usually one’s parents).
For the most part, private student loans are not eligible for student loan forgiveness. You can get grants to pay for private student loans, but the forgiveness programs available through the government do not apply to private loans. In addition, private student loans are often not eligible for things like income contingent repayment plans, forbearance, or deferment. More information on what these options are and why they are important will be found later in this article.
Federal student loans fall into three categories. There are Stafford loans, Perkins loans, and PLUS loans. Each of these federal student loan types has different options and terms. The vast majority of students get Stafford loans.
The most important thing about federal student loans is that you typically have a lot more repayment options and forgiveness options with federal student loans. The government wants to be repaid for the money they loan you, but they also don’t want students to be destitute after they graduate while trying to start careers and families. They offer a lot more options for repaying or forgiving your student loans so that you can easily make ends meet.
The vast majority of students have Stafford loans. These are direct loans from the Department of Education. It is also sometimes called the Direct Loan program. These student loans are either subsidized or unsubsidized, which is a difference in how interest is handled during the time you are enrolled in school.
Stafford loans are not based on credit. Everyone can get Stafford loans, as long as you are enrolled in college at least half time and working toward a degree. Subsidized Stafford loans are need based, meaning you have to have a low income to qualify. Unsubsidized Stafford loans are not need based. However, not all students qualify for the maximum loan amount.
Perkins student loans are need-based and were only given to those students with exceptional financial need. Unfortunately, this student loan program has been discontinued. Students who have been in school for several years may have Perkins loans, but they have not been issued since September 30, 2017, and could not be disbursed past June 30, 2018. If you were in school prior to these dates, it is possible that you might have Perkins loans.
PLUS loans are federal student loans that are taken out by the parents of the student. Or, they can be taken out by graduate and professional students. PLUS loans are made based on credit. You must not have an adverse credit history to get these loans, even though they are also direct loans from the Department of Education.
There is also a maximum amount that you can borrow from PLUS loans. You will not be able to get any more than the cost of attendance, minus any other financial aid that you receive. You cannot use PLUS loans for living expenses, including dorms and meal plans.
It is important to note that PLUS loans are not eligible for income-contingent repayment plans. Only standard repayment is available for PLUS loans. However, you do still have the deferment and forbearance options that come with other federal student loans, as well as the forgiveness programs.
Subsidized vs Unsubsidized Student Loans
The biggest difference between subsidized and unsubsidized student loans is how the interest is handled while you are still in school. Subsidized loans are need-based, and they are only given to students who meet certain low-income guidelines. Unsubsidized loans are not need-based, and they are given to all students who qualify.
When a loan is subsidized, that means that the interest is subsidized while you are in school. This essentially means that the government is paying the interest for you while you are working toward your degree. When you finish your degree, you will at that time be responsible for paying the interest on the loans.
Unsubsidized loans accrue interest from the time the loan is disbursed, regardless of how long you take to complete your degree program. You have two choices with unsubsidized loans.
You can opt to make interest-only payments each month while you are in school. This is preferable if you can afford it because it will mean that your loans cost you less in the long run.
The other option with unsubsidized loans is to allow the interest to accrue over time. When you finish your degree, the interest that has accumulated is capitalized and added to the principle of the loan. This makes the total amount that you have to repay and pay interest on even more than the amount of the loans themselves.
How to Defer Student Loans
There is an option with federal student loans and some private loans that allows you to defer your payments for a period of time. Usually, you cannot get a deferment for longer than a year except in certain circumstances, although you can renew deferments with federal loans.
There are several reasons you might be able to get a deferment on your student loans. You must qualify under one of these conditions in order to defer your loans. Private student loans may or may not have deferment options available.
When your loans are in deferment, it means that you are not required to make payments for that period of time, but your loans remain in good standing. Your loans do accrue interest during the deferment. This interest is usually capitalized and added to the principle of the loan after the deferment is over.
If you need to defer your private student loans you will need to contact the lender and find out if a deferment is an option and what the process to apply for deferment is. If you have federal student loans, contact your loan servicer and let them know you are interested in deferment and why. They will process your application.
While in School
If you are attending school toward a degree program, you can get your federal student loans deferred. While obtaining your first degree, your loans are automatically in deferment until you graduate. If you finish a bachelor’s degree, for example, and decide a few years later to continue on to get your masters, you can get a deferment while you are attending school for the master’s degree.
This option is typically not available for private student loans.
For federal student loans, you can get a deferment if you enter the military. You may need to renew the deferment periodically to reaffirm that you are still in the military. Few private student loans have this option.
Post-Active Duty Military
Federal student loans also allow you to defer payments following active duty in the military. You can usually defer your payments for up to six months after you leave military service. Again, this is not an option with most private student loans.
Private student loans never give you a break when it comes to income. However, the federal student loan program is a bit more forgiving. If you find yourself suddenly without income and are completely unable to make any payment on your student loans, you can get a deferment for economic hardship. These deferments are difficult to qualify for, but if you truly can barely pay your regular monthly bills and have no money to put toward your student loans, you might look into this option.
How Do I Find Out How Much I Owe in Student Loans?
Most students take out student loans throughout the time they work on their degree, which can be four years or more. Most students have between 8 and 14 student loans by the time they graduate. Having this many individual loans can make it difficult to sort out just how much you owe when the time comes to start repayment.
Learning what private student loans you owe is not a difficult matter. If you don’t remember all of the lenders that gave you student loans throughout college, you can easily determine who you owe money to by getting a copy of your credit report. You can then contact those lenders and find out where you stand currently with how much you owe and your monthly payments.
Determining how much you owe in federal student loans can be a bit more difficult. While all of the money that you borrowed federally came from the Department of Education, there are a number of loan servicers that are used by the government to handle those loans. You may have loans with multiple servicers, and each servicer can only tell you about the loans that they service.
Your credit report can sometimes come in handy when you are trying to determine how much you owe in federal loans as well. However, if you just finished school, the most recent loans may not show up on your credit report yet. In addition, your credit report just lists the Department of Education as the creditor, so you still won’t know who is servicing the loans.
The only sure way to know what federal student loans you have is to contact the Department of Education directly. They can tell you what loan servicers have been assigned to your student loans. Then you can contact those loan servicers to determine details such as payment plans, repayment options, and monthly payments.
Grants to Pay Off Student Loans
It is possible at times to get grants to pay off your student loans, both private and federally obtained. These grants are available for many people to apply, but only a select few are awarded the grants. Some of the grants are extremely competitive, while others are primarily a first come first served basis each year. The grant may not pay off all of your student loan debt, but it could greatly reduce it.
Most of the grants available for paying off your student loans are based on a career path after graduation. Some grants are also awarded based on military service. Some of the grants available include:
- Contraception and infertility research
- Public defenders or state prosecutors
- Mental health professionals in rural or underserved areas
- Nurse corps grants
- Students whose parents died in Iraq or Afghanistan military service
Grants do not have to be repaid. It is money that is simply given to you free of charge to put toward your student loans. There are many other grants available by state and from individual companies and fields of study.
Student Loan Forgiveness
Student loan forgiveness is not something that happens very often, but it is possible for some borrowers. You will not find forgiveness programs for private loans. Likewise, if you refinance your private and federal student loans into a private loan, you will lose your ability to participate in forgiveness programs. However, if you have federal student loans, you can look into these options.
It is important to note that there are a lot of companies out there purporting to have student loan forgiveness programs. Most of the phone calls you will get from these companies are scams, or they are not true forgiveness programs. Be wary. Only the federal government can forgive student loans, and they only do so under certain circumstances.
Forbearance is not really student loan forgiveness, but rather a reprieve from your student loans. When your student loans are put into forbearance it basically puts them on hold for a time. Your loans do not accrue interest during a forbearance, and you are not required to make payments during that time. To apply for forbearance for federal student loans you should contact your student loan servicer.
Income-Driven Repayment Forgiveness
The federal government offers income-driven repayment options that allow your monthly payment to be based on what you can reasonably afford. If you are part of one of these income-driven repayment plans, the remainder of your student loans that exist after a period of 20 to 25 years, depending on the plan, will be forgiven and dismissed as though they had been paid. To qualify you must be on the income-driven plan for the majority of the time you have the loans.
Public Service Forgiveness
There are student loan forgiveness programs for public service. These forgiveness programs are designed for those who get a college degree and enter a career in public service of some type. This might include police, firefighters, FEMA, careers with government entities, and military. You must work in the public sector for ten years while making payments on the income-driven repayment plan to qualify for forgiveness.
Teacher Loan Forgiveness
Teacher loan forgiveness is available for teachers who work in a public school system. When teachers work in public schools for ten years and are on an income-driven repayment plan during that time, their student loans are forgiven after the ten years are complete. In this way, you do pay a portion of your student loans, but the remainder of the loans after ten years is forgiven. How much of the loans are forgiven depends on how much you are required to pay on the income repayment plan.
The military has several student loan forgiveness programs available. These are not true forgiveness from the Department of Education, but rather are similar to grants. The different branches of the military have their own forgiveness programs. For example, the National Guard will give those who enlist up to $50,000 to repay their student loans if they qualify.
Student Loan Repayment Options
Private student loans have a wide variety of repayment options, depending on the lender. There are no regulations that state what repayment plans private lenders must offer to their consumers. As such, if you are getting private student loans, you should review the repayment terms carefully and shop around for the best loan that will work for you.
Federal student loans, on the other hand, come with an array of repayment options. The federal government wants to make it as easy as possible for you to repay your student loans. These repayment options are available for Stafford loans and consolidation loans. Some repayment plans are not eligible with PLUS loans.
Standard Repayment Plan
The standard repayment plan with federal student loans is equal payments that pay off the loan within ten years after you graduate. The amount of your payments is based on the interest accrued, the interest that will continue to accrue as you make payments, and the total amount of your loans. This is the most common repayment plan for PLUS loans.
Graduated Repayment Plan
The graduated repayment plan allows you to make smaller payments at the beginning of your repayment period with increasingly larger payments as time goes by. Payments go up every two years. With the graduated repayment plan, you still have your loans paid off within ten years, but your payments right out of school are lower. This repayment plan is available for PLUS loans.
Extended Repayment Plan
The extended repayment plan gives you more time to pay off your student loan debt. This is available for all federal student loans, including PLUS loans. With the extended repayment plan, payments may be fixed or they may be graduated. Either way, the loans are paid off within 25 years of the time you graduate.
Pay as You Earn Repayment Plan
With the pay as you earn repayment plan, your payments are never more than 10 percent of your income, although they will never be more than you would have paid under the standard repayment plan. The payments are recalculated each year and are based on your income and dependents. With this repayment plan, any loan balance after 25 years of payments will be forgiven and dismissed.
Income Based Repayment Plan
The income-based repayment plan is similar to the pay as you earn repayment plan. With the income-based repayment plan, your monthly payments are no more than 10 or 15 percent of your discretionary income, depending on when you received your loan. Payment amounts are recalculated each year and are based on your income and dependents. Any outstanding loan balance remaining after 20 or 25 years, depending on when you received your loan, will be forgiven.
Income Contingent Repayment Plan
With the income contingent repayment plan, your monthly payment is based on 20 percent of your income. Your monthly payment amount is recalculated each year and is based on your income, dependents, and the total amount remaining of your direct loans. If your balance is not repaid within 25 years, any remaining balance will be forgiven.
Income-Sensitive Repayment Plan
With the income-sensitive repayment plan, your monthly payments are based somewhat on your income. However, your loan must be repaid within 15 years. There is no forgiveness program with the income sensitive repayment plan.
Student Loan Refinancing
The average student has 8 to 14 loans when they complete a four-year degree. This is due to the fact that often you get more than one type of loan per semester. Dealing with all of those individual loans can be devastating to your budget. Not only do you have multiple lenders and loan servicers to deal with, but you also have multiple monthly payments that could add up to well above what you would pay if you had one single loan.
Student loan refinancing or student loan consolidation is a good way to get control of your student loan debt after you graduate. There are some important things to consider before doing so. First, keep in mind that if you refinance federal loans with private loans or a private lender, you will lose the repayment options and forgiveness programs available through the federal government.
Second, you should be aware that when you refinance student loans with a private lender, you could wind up paying more in interest. The fixed rates offered by private lenders are often more than the fixed rates of your federal loans. In addition, variable rates may be lower at first but could increase over time.
Federal Student Loan Consolidation
The most important thing to remember with federal student loan consolidation is that you can only do it once. You cannot consolidate your loans, go back to school, and then reconsolidate them all together. If you are not sure that you’re done with school, you might want to wait to consolidate your federal loans under the direct loan program.
Consolidation of federal student loans under the direct loan program is a fairly simple process. The biggest obstacle is making sure that you include all of your federal loans in the consolidation. It is your responsibility to do your homework and discover all of the loans you have with every servicer and list all of them on your consolidation application.
Federal student loan consolidation is not based on credit. Anyone with federal student loans can use a direct loan consolidation. With a consolidation loan, you are still eligible for all of the same repayment plans and forgiveness programs that are available with your original federal student loans.
Private Student Loan Refinancing
Private student loan refinancing is not as cut and dry. You can refinance private and federal student loans together into one private loan, but doing so will negate any repayment plans and forgiveness programs you may have been eligible for under the federal government. Interest rates vary widely as well.
Private student loan refinancing is also based on credit. While lenders vary, you generally must have at least three years of credit history and a credit score of at least 600 to get a private refinance. Many lenders require a score of 650 or more. You can sometimes get a cosigner to help you get a private student loan to refinance, but if you choose that option you should shop around. Some lenders require the cosigner to remain on the loan for the entire duration of the loan, while others will allow the cosigner to drop off after two to three years of on-time payments.
One of the advantages of private student loan refinancing is that you can include parent PLUS loans in your refinance to get the debt out of your parent’s names. With federal student loan consolidation, the parents are always responsible for the debt, and PLUS loans cannot be included in a consolidation.
Another thing to watch out for with private student loan refinancing is making sure that all of your eligible loans are included. Whether you want to refinance only your private loans or both your private and federal loans, you will want to make sure that all of your student loan debt is accounted for.