Guide to Student Loans

In this article we’ll cover:

  • Different types of student loans

  • How to apply for student loans

  • Types of repayment plans

  • Types of loan forgiveness

College is widely hailed as one of the best, if not the best, investments someone can make into themselves, but a lot of people are averse to the idea of going to college because of its exorbitant costs. There are many ways to receive financial assistance toward paying for a college education, one of the most common being student loans. Student loans have their flaws, as evidenced by the collective $1.75 trillion debt borrowers in the United States have, but they are unavoidable for many if they want to go to college.

Different Types of Student Loans

There are two general categories for student loans: federal and private loans. Federal student loans are not credit-based, don’t require a co-signer to access them, and nearly all students with a high school diploma are eligible for them. Private loans, on the other hand, oftentimes will require a credit check and may require a co-signer who takes responsibility for the loan if you can't repay them. Generally, federal student loans are a better option, since they have lower interest rates, protections for the borrower, and don’t require a credit check.

There are three types of federal student loans: subsidized direct loans, unsubsidized direct loans, and PLUS loans. Federal student loans generally have a fixed interest rate. Subsidized loans are given to students based on their demonstrated financial need, which is based on the Federal Application for Federal Student Aid (FAFSA). These loans are subsidized by the government, meaning that they will pay the interest on these loans while you are in school and for a grace period following graduation. For unsubsidized loans, the government will not pay for your interest while you are in school, and it will accrue during all periods. These loans are available to both undergraduate and graduate students regardless of financial need. PLUS loans are available for graduate students and parents to fill in financial gaps that other loans cannot cover. They generally have higher interest rates and will require a credit check. If you are an undergraduate, you can borrow between $5,500 to $12,500 per year, depending on what year of school you are in and your dependency status. Graduate students can borrow up to $20,500 per year.

Private loans should only be used when the federal options have been exhausted, as they have higher interest rates and less protection for borrowers. Almost all private loans require a credit check and they can refuse you if you have a poor or no credit history. In order to be more likely to acquire a private loan, you can use a co-signer that assumes some responsibility for the debt, or go for a private loan specifically designed for students with poor/no credit.

Private student loans can either have variable or fixed interest rates. They can cover any cost associated with attending college and originate from a bank, online lender, or credit union. States also offer their own student loan programs, but they operate more like private than federal loans. Private loans can also cover less traditional expenses that federal loans do not. A fairly common example of this is the bar exam loan, which can be applied to prep classes and exam application fees.

How to Apply for Student Loans

In order to apply for federal student loans, you will have to complete the Federal Application for Student Aid (FAFSA). It is a government questionnaire that asks many questions about your family’s financial situation in regards to both the student’s and guardian’s finances. It is recommended to complete the FAFSA form with your family together. Once you have completed the FAFSA, which opens on October 1st every year, your Expected Family Contribution (EFC) will be calculated. The government uses your EFC to see which forms of aid you are eligible for and that information is passed onto the schools you have been accepted to. Once you receive your acceptance letter, there will be a financial aid letter accompanying it telling you which loans you qualify for and the steps you need to take to make these loans official. You can accept the whole loan, part of the loan, or none of the loan at all. As for private loans, your school will generally give you a lender list of places that can give private student loans. You can use this list, or ask others for recommendations on places they have used and look into banks, online lenders, and credit unions. Once you’ve contacted a lender and verified they give private loans, they will each have their own process for receiving the loan. A credit check will be involved, and a co-signer may be necessary. Private loans tend to be more specific than federal loans, so you should look into loans specific for your situation. For example, loans for medical school can have a much lower interest rate than a general private student loan at certain lenders.

Types of Repayment Plans

Depending on what type of student loan you get, interest can begin accruing the second you start school. When you make a payment toward your loans, the interest gets paid first before the principal. When you take out your loans, you will elect which type of repayment plan to use. The following are some federal repayment plans:

  • Standard - repayment lasts 10 years and it’s the best one to stick with for the least amount of interest.

  • Graduated - repayment lasts 10 years but your monthly payments are lowered and increased at a bi-yearly rate.

  • Extended - extended repayment plans can be structured as the 25-year version of a standard repayment plan or a 25-year version of a graduated repayment plan.

There are also 4 income-driven repayment plans, all of which will forgive the remainder of your debt at the end of their respective payment period:

  • Income-Based Repayment (IBR) - monthly payments will be 10% of your discretionary income divided by 12 and will last 20 years.

  • Pay as You Earn Repayment Plan (PAYE) - monthly payments will be the same as IBR, but can never exceed the standard 10 year repayment amount. Lasts 20 years.

  • Revised Pay as You Earn Repayment Plan (REPAYE) - monthly payments will be 10% of your discretionary income divided by 12. For undergraduate study, it lasts 20 years, and it lasts 25 years for graduate study.

  • Income Contingent Repayment (ICR) - the lesser of 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income. These last for 25 years.

The repayment plans for private loans will depend on the lender, and you should ask about all your options before you commit to a loan.

Types of Loan Forgiveness

The following are some of the different types of federal loan forgiveness programs:

  • Public Service Loan Forgiveness (PSLF) - available for direct federal loans. If you are employed by a government or nonprofit organization, you may qualify for loan forgiveness under the PSLF. After you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer, the rest of your debt will be forgiven.

  • Teacher Loan Forgiveness - available for direct federal loans. If you teach for five consecutive academic years for a low-income elementary school, secondary school, or educational service agency, you may be eligible for up to $17,500 forgiveness on your eligible loans.

  • Total and Permanent Disability Discharge - available for direct federal loans. If you are totally and permanently disabled, you may qualify for the discharge of your federal student loans.

  • Closed School Discharge - available for direct federal loans. If your school closes while you are in attendance or soon after, you may be eligible for the discharge of your federal loans.

  • Discharge in Bankruptcy (rare) - available for direct federal loans. This is not an automatic process, but, in some cases, you can have your federal loans forgiven after declaring bankruptcy.

These options are just for federal loans and private loans often do not have forgiveness programs put in place, which is one of the reasons they should only be taken out after federal options are exhausted.

Key Takeaways

  • Student loans can either be federal or private

  • Federal loans are generally preferred due to their lower and fixed interest rates and forgiveness programs put in place to protect the borrower

  • To qualify for federal loans, you must complete the Federal Application for Financial Student Aid

  • Private loans generally require credit checks and can be acquired through financial institutes like banks and credit unions

  • There are many types of repayment options and it is important to choose the right one for you

  • Federal student loans generally have loan forgiveness programs that can be based on your repayment plan, while private loans do not