Taking out a student loan is an important financial decision that will impact your budget and your credit score for many years. Responsibly managing your student loans means knowing the details of your loan, including whether it is federal or private, your estimated monthly payment, repayment options and where to seek support, if needed.
TYPES OF LOANS
There are different types of student loans. Knowing which loan you have will help you better understand your repayment options and which resources are available to you for accessing student loan information.
Federal Loans:
- Direct Subsidized – Used for undergraduate programs and based on financial need. Government pays interest while you are in school and during grace periods.
- Direct Unsubsidized – Available for undergraduate, graduate or professional degrees; not based on financial need. You are responsible for interest during enrollment and grace periods.
- Direct PLUS – Taken out by parents of undergraduates or by graduate/professional students to cover costs not covered by other aid.
Private Loans
Loans funded by private lenders such as banks and credit unions. Used for undergraduate or graduate studies.
Consolidation Loans
Combine multiple loans into one with a single lender and single monthly payment. Only federal loans can be consolidated into a federal Direct Consolidation Loan, but private lenders may consolidate federal and private loans together.
APPLYING FOR STUDENT LOANS
Federal Loans – The Free Application for Federal Student Aid (FAFSA) should be completed each year of enrollment. Family income and situations can change, causing student aid eligibility to fluctuate as well.
Private Loans – Apply through a financial institution directly. As with all debt, a higher credit score could lead to a lower, more favorable interest rate and a higher loan amount.
Consolidation Loans – If you already have multiple federal or multiple private student loans, consolidation of those loans is possible. While only federal loans can be consolidated into a federal Direct Consolidation Loan, many lenders are able to consolidate all of your student loans. Consolidation can result in a single monthly payment but might cost more in overall interest paid.
STUDENT LOAN TERMS TO KNOW
Principal: The outstanding balance on the loan. This is the amount originally borrowed.
Interest: The amount paid to the lender as the cost for borrowing. Student loan interest is typically based on both the interest rate (which can be fixed or variable) and the interest rate accrual period.
Estimated Monthly Payment (EMP): Monthly amount owed based on principal and interest.
Number of Years: Total time to repay the loan.
PLAN FOR STUDENT LOAN REPAYMENT
Student loans are a major investment. Since you will need to repay student loans with interest, it is important to take out only the amount you will NEED. See if it’s possible to only take out student loans for education costs and not living expenses. There are tools you can use to plan how much you will need.
- Federal Student Aid Estimator can be used to determine an early estimate of federal student aid for which you will be eligible.
- Net Price Calculator will connect you to the institutions you are interested in to get an idea of what previous students in similar situations paid to attend that institution after grants and scholarships.
WAYS TO MINIMIZE STUDENT LOAN NEEDS
Employment – Working a part-time job during semesters and full-time during the summers can provide income to cover expenses.
Scholarships and Grants – There are many different types of scholarships and grants available for all students. Research all possible sources of free money before filling out the FAFSA form.
Examine Budget – Identify additional areas of income and find budget hacks to minimize expenses. For example, selling old clothes and other unused household items can provide supplemental income when necessary.
Annual FAFSA – Many state and institutional grants and scholarships are awarded based on information submitted to FAFSA. Update it every year with your financial situation to keep it accurate. Part-time employment might affect eligibility for grants and subsidized federal loans.
STANDARD LOAN REPAYMENT OPTIONS
The standard repayment for federal loans is 10 years; private loans may differ. The grace period is a set period of time after leaving school or dropping below minimum enrollment before you must begin repaying your loan.
Federal Loans – Direct Subsidized/Unsubsidized have a 6‑month grace period. Direct PLUS Loans have none.
Private Loans – Grace periods vary by lender.
OTHER FEDERAL REPAYMENT OPTIONS
- Extended Repayment Plan: Available for Direct and PLUS loans over $30,000 and consolidation loans. Monthly payments are made over 25 years instead of 10. Monthly payments will be lower than a standard repayment plan, but more interest will be paid overall.
- Graduated Repayment Plan: Available for Direct and PLUS loans. Low initial payments that increase over time. The loan will still be paid off in 10 years, but more interest will be paid overall.
- Income‑Driven Plans: The monthly payment is based upon a certain level of discretionary income. Payments are made over 20 to 25 years, and any remaining balance is forgiven after that time. The total student loan amount paid, and the amount of the forgiven balance will vary based on your income as compared to your debt. If your income rises quicky, you might even pay off the entire balance before reaching the end of your repayment period.