Student Loans 101: What you need to know about College loans

As the cost of higher education continues to rise, many students are turning to student loans to help finance their education. While taking out a student loan can help you achieve your educational goals, it’s important to understand the implications of borrowing money and how it can affect your future. 

In this blog post, we’ll discuss what students should know about student loans, including the types of loans available, how to apply for them, and tips for managing your loan repayment. 

Whether you’re a current student or planning to attend college in the future, understanding the ins and outs of student loans can help you make informed decisions about your financial future.

This post is a brief Student Loans 101, to explain everything you need to know about student loans, so that you can decide whether and how to use them. 

What are student loans?

Student loans are a type of financial aid that students can use to pay for their education. Students (and sometimes parents) borrow money through student loans to help pay for college. These loans are typically offered by the government or private lenders and can be used to cover tuition, fees, books, and living expenses.

The two main types of student loans are federal loans and private loans. Federal loans are offered by the government and have lower interest rates and more flexible repayment options. Private loans, on the other hand, are offered by banks and other lenders. Typically, private loans have higher interest rates and less flexible repayment options.

When a student takes out a loan, they are borrowing money that they will need to repay with interest. The amount of the loan and the interest rate will depend on the type of loan and the student’s creditworthiness. 

Repayment typically begins after the student graduates or drops below half-time enrollment.

It’s important for students to understand the implications of borrowing money through student loans, as they will need to repay the loans after they graduate. However, student loans can be a helpful tool for financing a college education and achieving one’s career goals.

Why use student loans?

Going to college is expensive. Tuition, room, board, and fees cost more than $20,000 per year at the average public university, and more than $43,000 per year at the average private institution.

Multiply that by the four years it takes the average student to earn an undergraduate degree, and you’re looking at spending approximately $80,000 at a public university or $172,000 at a private institution. Yikes!

Most families don’t have that much money saved for college. In 2019, 69 percent of college students took out student loans, and 14 percent of their parents did. Now, student loan debt in the United States totals more than $1.68 trillion. In fact, about 45 million student borrowers each owe an average student loan debt of $37,000. 

 Student loans can provide a way for students to pay for these expenses without having to pay for everything out of pocket.

Additionally, many students may not have the financial resources to pay for college on their own or may not qualify for enough scholarships or grants to cover all of their expenses. In these cases, student loans can help fill the gap and make it possible for students to attend college.

Furthermore, investing in education can pay off in the long run. Earning a college degree can lead to higher-paying jobs and better career opportunities. By taking out student loans, students can invest in their future and increase their earning potential.

How do student loans work?

Student borrowers can take out different types of loans to pay for college. Comparing all your loan options can be very confusing and overwhelming. Taking time to be understand the different types of loans available and how they work will give you peace of mind—and hopefully save you money—in the long run. 

Student Loan Interest Rates

The interest rate of a loan is the cost of taking out a loan. The interest rate is how banks make money from your loan. The interest rate is the percentage you pay (on top of repaying the amount of money you borrowed). 

Interest rates for federal student loans are fixed. They will not change as long as you have the loan. 

Interest rates for private student loans, issued by by private lenders, credit unions, and banks, may be fixed or variable, meaning they can change over the life of the loan.

Student loan origination fees

Student loan origination fees are one-time fees charged when you take out the student loan.

Origination fees vary depending on the type of loan and the lender. Origination fees are often rolled into the amount of the loan, so you pay off origination fees over time.

student loan repayment terms

The repayment term of a loan is how long you will take to repay the loan.

The monthly loan payment you have to make and the total amount of interest you will pay on a loan depends on how long you take to repay the loan.

Understand the repayment plans and repayment terms before taking out student loans. 

TYPES OF STUDENT LOANS

FEDERAL STUDENT LOANS

Direct Subsidized (Stafford) Federal Student Loans

Direct subsidized loans are for undergraduate students who demonstrate financial need. They help cover the costs of higher education at a college or career school. Financial need is determined by the difference between the Cost of Attendance (COA) and the Expected Family Contribution (EFC) as determined by the Free Application for Federal Student Aid (FAFSA). This application considers things like family income, family size, and savings. 

The federal government pays the interest for you through your time at college, for up to six months after graduation and if you need a loan deferment. You do not accrue interest on the loan until you begin to repay the loan. If you need to take out loans to pay for college, take the subsidized federal loans first. 

You can borrow up to $3,500 your first year, $4,500 your second year, and $5,500 your third year and beyond, for a total of up to $23,000. 

Direct Unsubsidized Federal Student Loans

Direct unsubsidized loans are made to eligible undergraduate, graduate, and professional students; eligibility is not based on financial need. 

With an unsubsidized loan, you are responsible for the interest on the loan from the moment the loan money is distributed. Interest accrues on the loan from the moment you borrow it. 

So, when you begin to repay the loan, you are paying the original amount of the loan and all the interest that accrued during your years of study, ever since the first day you received the loan money. 

Dependent undergraduate students can borrow up to $5,500 the first year, $6,500 the second year, and $7,500 the third year and beyond, for a total of up to $31,000. Independent undergraduate students can borrow $9,500 the first year, $10,500 the second year, and $12,500 the third year and beyond, for a total of up to $57,500. Graduate students can borrow up to $138,500 total. 

Applying for Federal Student loans

To apply for federal student loans, you’ll need to fill out the Free Application for Federal Student Aid (FAFSA) form. This form is used to determine your eligibility for federal loans, grants, and other types of financial aid. You can fill out the FAFSA form online at the Federal Student Aid website.

Direct PLUS Federal Student Loans

These loans are commonly called Parent PLUS loans when they are made to parents of dependent undergraduate students (or Grad PLUS loans when made to a graduate or professional student). 

These loans help pay for education expenses that aren’t covered by other financial aid. The US Department of Education is your lender. A credit check is required, and borrowers with poor credit history must meet additional requirements to qualify. 

PLUS loans are unsubsidized loans, so interest on the loan begins to accrue immediately after you receive the money. 

Applying for Parent PLUS Loans

Parent PLUS loans are federal loans that are available to parents of dependent undergraduate students. To apply for a Parent PLUS loan, the parent will need to complete the application on the Federal Student Aid website and undergo a credit check.

PRIVATE STUDENT LOANS

Private lenders, like banks and credit unions, give loans based not on the cost of attendance, but on the perceived ability to repay the loan. These loans may cover additional tuition, room, or board costs. Private loans may be used to pay for living expenses or other incidental costs of college. 

Private loans require credit checks. The amount of the private loans varies based on the amount the lender expects the student or family to be able to repay. 

Applying for Private Student Loans

To apply for private student loans, you’ll need to research lenders and compare interest rates, repayment terms, and other loan features. Once you’ve found a lender that you want to work with, you’ll need to fill out an application and provide information about your income, credit score, and other financial information.

Confused by terms you don’t understand? Learn the lingo of college loans here.

PAYING BACK STUDENT LOANS

Student borrowers often expect to be able to pay back the loans easily when they graduate and start working. Unfortunately, some new graduates may have a hard time finding a job or may not find a job that pays as much as they had expected to earn. 

Borrowers may underestimate their living expenses and have trouble making their monthly loan payments fit their budget. Some loans allow borrowers to use an income driven repayment plan. Unfortunately, these income-based loan payments may be too low to pay off the principal amount of the loan. 

For federal student loans, borrowers usually have a six month grace period after graduation to start repaying student loans. 

For private student loans, repayment terms vary. However, students usually have to begin repaying loans right after graduation. 

Student loans have to be paid back. Student loan payments can be a significant part of a new graduate’s monthly budget. Don’t count on student loan forgiveness to eliminate your student loan debt!

QUESTIONS TO ASK BEFORE TAKING STUDENT LOANS

Taking on student debt is a serious commitment. There are many benefits to earning a college degree. However, there are also many drawbacks to having student loan debt. 

Many people with student loans have waited to get married or start a family, been unable to afford a house, postponed investing in their retirement, delayed traveling, or been unable to leave a job they hated. 

It’s important to make an informed decision before taking on any student loan debt. 

Cost of Attendance

Be sure you understand the total cost of attendance for each college of university you are considering attending. Check with each school’s financial aid office if you have any questions about your financial aid package. 

Find out how much you will have to pay for college each year. Find out how much money you or your parents have to contribute to college costs. Then decide if you will borrow money to make up the difference. 

It is best if students and parents can have a conversation about college costs and savings when the student starts high school. Knowing how much money is available for college expenses will help a student decide which schools to apply to. 

Total Debt

Do the math and figure out how much you will need to borrow for college tuition and school-related expenses for four years. Then find out how much unpaid interest will accrue while you’re in college.

t’s very important to figure out how much total debt will you have after four years of college. If it takes you five years to graduate, how much debt will you have? 

You need to know what your total student loan amount will be before begin to borrow. 

Payments

​Ask your lender when your first student loan payment will be due. How long is the grace period after you graduate until you have to make a payment. 

What will the payments be? Find out if the loan payments are fixed or if monthly payments can vary. 

Does your lender offer income-driven repayment plans? If so, ask how long it your repayment period will be if you don’t have much income and are making small payments. 

Interest rates

What is the interest rate for the loan? Will it stay the same (fixed interest rates) or can it change (variable interest rates)?

How will changes in the interest rages change the amount you owe. 

Find out what current interest rates. Find out how much variable rates can change. Choose loans with lower rates before loans with higher rates. 

Ask the lender when interest begins to accrue. Private loans and unsubsidized federal loans usually begin to accrue interest right away. 

True costs

​Look carefully at your loan terms and ask lots of questions to determine what the true costs of your student loans will be. 

If you pay off your debt over 10 years, what will your monthly payment be? Is that a number you can realistically afford? 

If you pay off your debt over 30 years, what will your monthly payment be? Will having to make that payment every month prevent you from doing other things you want to do?

Ask yourself how student loan repayments will affect your budget. There’s a good chance that you’ll have to delay other expenses (like going to graduate school, traveling or having kids) in order to make your student loan payments. 

Other options to reduce college costs

​To lower the amount of student loan debt you have, try to find other options to reduce your college costs. 

If Federal Work Study is part of your financial aid award, plan to work on campus during college. Even if it’s not, you can still get a job during college. Having a job as a college student can be a good idea, because you’ll be able to cover some or all of your living expenses. You can earn a lot of money for college with a summer job. 

Consider your future

Think about your plans for your life when you graduate from college. If you plan on getting an advanced degree, know that grad students and medical students often have to borrow money for their degrees. 

If you plan to work after you graduate from college, what type of job will you be qualified for? And how much is it likely to pay? Talk to people working in the field to see what a new graduate just starting their career is likely to earn. 

No young adults like to consider worst-case scenarios, but find out if there are any circumstances when you would be allowed to take a break from repaying your loan. Financial institutions take loan repayment seriously, and many are unlikely to make exceptions for difficult situations. 

Know what you’re agreeing to

Be sure you fully understand the terms of each loan. If your parents are taking out Parent PLUS or private loans loans, will you or your parents repay them? Will repaying your student loans negatively impact your parents’ ability to retire? 

If you have a co-signer, what will you need to do to ensure that your loan doesn’t have a negative impact on their finances? How will you avoid damaging that relationship? 

​Expect that you will have to repay the loans you take out. Loan forgiveness plans are in the news a lot, but realistically, you should not expect your loans to be forgiven.

HOW TO MANAGE STUDENT LOAN DEBT

Only borrow what you need

First choose an affordable school

The cost of tuition and fees can vary widely between colleges and universities. Students should research and compare the costs of different schools before deciding where to attend. Choosing an affordable school can help reduce the need to borrow money through student loans.

Apply for scholarships

Scholarships and grants are a type of financial aid that doesn’t need to be repaid. Students should research and apply for as many scholarships and grants as possible to reduce their need to borrow money through student loans.

Work part-time while in school

Many students work part-time while in school to earn money and reduce their need to borrow money through student loans. Additionally, working while in school can help students gain valuable work experience and build their resume.

Set a budget

Students can reduce their living expenses by living frugally while in school. This can include living at home and commuting to college, sharing housing with roommates, cooking meals at home instead of eating out, and avoiding unnecessary expenses like buying new clothes or electronics.

Set a budget and minimize your spending. Understand all the costs of college, including books, social activities, Greek life, health care, and food that’s not in your meal plan. Decide which expenses you can cut or reduce.

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Compare and understand all your options

Be sure you understand the terms of each loan that is offered to you. Ask lots of questions. Don’t sign until you are comfortable with the terms of the loan. Make sure you understand all the details, including the:

• interest rates
• repayment terms
• ​lender fees
• repayment period
• monthly payment amount
• repayment assistance programs
• reputation of the lenders 

Reviewing the terms and conditions of your loans can help you plan for repayment and avoid missing payments or defaulting on your loans.

Pay attention to the details

Keep careful records of all your loans. Make a spreadsheet that lists all your lenders, the monthly minimum payments, and the due dates. Know when you must begin repaying the loans. 

Be sure each loan servicer has your up-to-date address, email, and phone number. If you don’t hear from them, don’t assume that means they don’t want their money back. Avoid default at all costs. 

Student loan debt can be a helpful tool for financing higher education. But it also has a steep learning curve and can be overwhelming. It’s incredibly important to stay on top of payments. 

Must-Read Books about Student Loans

Final thoughts on Student Loan Basics

Student loans can provide access to higher education for many students who might not otherwise be able to afford it. However, taking out loans can also come with a significant financial burden that can last for many years after graduation. 

It’s important for students to carefully consider their options, compare loan terms and details, and make informed decisions about borrowing and repayment.

 By using strategies to minimize debt and manage repayment, such as applying for scholarships and grants, working part-time, and living frugally, students can minimize the financial impact of their loans and make a successful transition to post-graduation life.

With careful planning and responsible borrowing, students can achieve their education goals while minimizing the financial burden of student loans.