Five Things to Know About Your Student Loans

Over the next few months, many students who graduated or left school in the spring of 2012 will reach the end of their grace period and start repaying their student loans. Now is a great time to brush up on the basics of student loans.

student loans logoFinancial aid comes in many forms. Grants and scholarships are often called “gift aid” because they don’t have to be repaid. Another form of financial aid is work-study.  Federal Work-Study provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses.

Student loans are the other major form of financial aid. A loan is money that a student borrows and must pay back, so it is important that you understand your options and responsibilities.

Here are five things you should know about your student loans:

1.     Federal vs. Private Loans

Federal loans are managed and backed by the U.S. government.  These loans are designed to provide students with fair treatment.  Because they offer the best terms for borrowers, federal loans are the best option for students.

Private loans are managed and backed by private banks.  These banks are not subject to the same rules and regulations of federal loans, and may feature higher (or variable) interest rates, stricter repayment plans and penalties, or other terms that may make them more expensive.

You also may encounter other, less common types of loans, such as state loans (managed by your state) or institutional loans (managed by your college or university).  In all cases, carefully read and understand the loan terms before deciding to accept.

2.     Unsubsidized vs. Subsidized Loans

Federal loans can be either subsidized or unsubsidized.  A subsidized student loan means that the government pays the interest for you while you’re in school, as long as you’re enrolled at least half time.  That means that if you take out a $5,000 subsidized student loan to pay for your freshman year, and graduate in four years of full-time classes, you’ll still owe $5,000 when you graduate.  Interest will only “accrue,” or be added to the repayment amount, after you stop being a student.

An unsubsidized student loan means that interest “accrues” even while you’re in school.  Some federal loans and nearly all private loans are unsubsidized.  You don’t always have to pay the interest while you’re a student, but the total amount you’ll need to repay is still growing.  If you have an unsubsidized student loan, it’s a good idea to pay the monthly interest while in school, even if you don’t need to.

3.     Loan Interest Rate

The interest rate is a percentage that determines how much your loan balance increases each year.  Consider it the price that you pay for being able to borrow money from the lender.  For example, if you have a $5,000 loan with a 5 percent interest rate, your annual interest will be $250 (5% x $5,000), which means at the end of the year you will owe $5,250.

4.     Loan Length of Repayment

When you start repaying a loan, you have a set amount of time to repay your loan known as the length of repayment.  A longer length of repayment means a lower monthly payment, but it also means a higher total amount repaid over the life of the loan.

Federal loans typically follow a ten-year repayment plan schedule, but depending on the type of repayment plan, your length of repayment could last as long as thirty years.  One key benefit of Federal loans is the ability of the borrower to switch repayment plans without penalty.  If you find a given repayment plan too difficult, research your options regarding extended repayment plans to determine if one is right for you.

5.     Monthly Loan Payments

The principal, interest rate, and length of repayment of a loan determine your monthly loan payment.  This is the amount you’ll need to pay each month.  Each loan has a separate monthly loan payment, so if you have more than one loan, you will have to pay several loan payments each month.  If you prefer to have a single loan payment, you should consider researching the Federal Loan Consolidation program to see if it’s right for you.

You may find that the monthly loan payments are too high and that you cannot pay them all.  If this occurs, seek help.  Research options such as income-based repayment, the public service loan forgiveness program, loan deferment, or loan forbearance to determine if one is right for you.  Remember, however, that options designed to decrease your monthly loan payments may increase the total amount you have to repay over the life of the loan.

Loans have many different characteristics, but they don’t have to be confusing.  Always carefully read and understand a loan’s features before accepting it. Your loan servicer or financial aid counselor can be great resource if you need help understanding the terms of a loan. Additionally, The Department of Education offers a number of tools, such as our repayment calculators and the Financial Awareness Counseling Tool (FACT), to help you research your options. By educating yourself, you will be prepared to make the best decisions for your own future.

7 Comments

  1. I have read articles about the changes in law during President Obama’s term. One of the articles described repayment of student loans won’t exceed 15% of the borrowers income. I can’t find any articles written by the government that describe this limit. Also, while I was looking for information I also called the lender, Sallie Mae, to discuss the Obama Loan – not just the forgiveness part, but also how it can possibly help the student who will need more loans. I found that Sallie Mae and Wells Fargo did not have any knowledge of these benefits. If the 15% repayment, the consolidation and forgiveness benefits are in effect, could it be that the lender doesn’t want borrowers know this information? I am really tired of being beaten up by lenders of student loans – my daughter graduated with a 5-year teachers degree and had $80,000 of loans to pay back. My son’s loan interest rates are nearly 3 times mortgage rates. I will get off the soap box, but when students need financial assistance the government should truly assist them as opposed to giving lenders even more of a stronghold on the youth. After searching the web for days, can you direct me to a source that can assist my son? He is 21 and has been going to college for 3 years.

    • The repayment plan that caps student loan payments at 15% of income is the Income-Based Repayment Plan. However, please note that it is only available for federal student loans. You can find out more about the Income-Based Repayment plan, as well as a calculator that would help you determine eligibility by going to StudentAid.gov/IBR. Sallie Mae is a federal student loan servicer, so it is possible that the Sallie Mae loans you are referring to could be federal loans. You can find out by visiting the National Student Loan Data System (NSLDS) at nslds.ed.gov and selecting “Financial Aid Review.” If your child has federal student loans, each loan will be listed there along with the name of the company that is servicing the loan. However, please note that Sallie Mae is also a private student loan lender as is Wells Fargo. Private student loans generally lack benefits like the Income-Based Repayment Plan. So, if your son or daughter has private student loans with them, then they will not be eligible for the Income-Based Repayment Plan. For more information, contact us.

      Federal Student Aid

  2. I went to school back in 1997, and had student loans for the school I was attending (Devry). I had to financial hardship I had to withdraw from school and get a job. Since I wasn’t able to get a job that paid enough for the loans (KFC) eventually my loans became delinquent. Soon my wages began to be garnished, and still are after 8yrs. I am now 34yrs old back in the community college. Is there anyway I can receive Financial Aid again? After all money is going towards the loans by my wages being garnished for about 8yrs now. I will never be able to pay this back if I don’t get a higher paying job, and that is why I am back in school. My interest is constantly going up. Can you give my some information on what I can do? Options I have? Thanks!

  3. I wonder how many banks/mortgage companies would extend $10K-$200K credit line or mortgage to an 18yr old student? Probably none. So when students are sold a bill of goods that education loan debt is ‘good debt’ by colleges and universities who promise them that 85% of their graduates land a job with 30-60days of graduation, any 18yr old would take the bait. We all want to imagine the best outcomes, unfortunately, jobs are not materializng as fast as students are graduating. We need to start advising college students at least two years before they graduate of their options for IBR etc. In addition high schools should include some financial literacy workshops for juniors/seniors so that they understand what they are getting themselves into before they make a decision to take on loans. Some employers run credit reports along with CORI etc and if a student loan is in default the college graduate who desperately needs a job will not even be considered for employment.

  4. “Many students who graduated or left school in the spring of 2012 will reach the end of their grace period and start repaying their student loans. Now is a great time to brush up on the basics of student loans.”

    Um, wouldn’t it actually have been better to have this info long before, like when they decided to take out the loans? At this point it’s not like 1-4 is of any to those who’ve “reached the end of their grace period and need to start repaying their student loans.”

    • @Skeptic… The documentation and applications for federal loans are quite extensive. All the information included in the post if just restating information included in the application package. Students must sign forms and participate in training noting they understand these rules.
      Now whether the individuals accepting the loans paid attention to these materials are another question. But we can’t blame the government for that…

      • @ Skeptic
        As someone who works in Higher Ed. and specifically in financial literacy it is a struggle to get students out to programs to learn about student loan repayment and how to incorporate it into their financial lives. At the institutional level it is important to recruit and maintain students, trying to talk to students about student loans and their consequences when they are 18 about what is going to happen 4 to 5 years in the future hasn’t been beneficial. They can’t grasp it, because it isn’t real yet, then when it is real it’s to late. We try to talk to them about how to be smart with their loans so they avoid taking out more than they need hence having to pay back less.

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