Paying for your college education is expensive, but student loans make it possible for many to secure their desired education. The key is understanding what it means to borrow these funds and, ultimately, when and how to repay them. Student loan debt is not a problem unless you find it impossible to repay later. Here's what you need to know to get started on this debt repayment process.
Types of Student Loans
There are numerous types of student loans, each with a different set of borrowing and repayment rules. Here is a look at some of the main types you may encounter.
Federal Student Loans
The most common loans are federal student loans, obtained by completing the Free Application for Federal Student Aid or FAFSA. These loans are typically need-based, based on a student's expected financial contribution (and that of their family) to repaying their debt. Some types of federal student loans include:
- Direct Subsidized Loans: These loans are typically for undergraduate students with financial needs. They tend to have a low-interest rate and easier qualifications. Students don't have to repay until after they graduate.
- Direct Unsubsidized Loans: These loans are available for undergraduate and graduate students but do not consider financial need. The interest rate is higher but still less than most other types of loans. Interest grows even while you're still in school.
- Direct PLUS Loans: This type of loan is for parents of dependent undergraduate students and graduate students or professionals returning to school. The interest rate is higher, but access to borrowing is more accessible, though credit scores can play a role here.
Private Loans
You can also obtain a student loan from private lenders, which could help you significantly increase your chances of getting the funding you need. Private student loans have terms and conditions set by the lender, which may or may not fall under the same guidelines as traditional student loans.
Understanding Interest Rates and Repayment Terms
Most student loans have interest rates much lower than personal loan rates but tend to be higher than mortgage rates. These interest rates are also dependent on various factors.
For example, interest rates will remain the same throughout the loan's lifetime for many of the most common federal student loans. You do not have to start making payments on the loan until you graduate (generally six months after graduation or if you are no longer enrolled full-time). Direct subsidized loans commonly exhibit that feature, but unlike them, unsubsidized loans charge interest while you're still in school.
When comparing loan options, look for the following:
- The current interest rate.
- The term of the loan, which may span from 10 years or longer.
- When repayment of the loan begins.
- Whether interest builds when you're in school or not.
- Who is responsible for the loan (with PLUS loans, parents hold responsibility for repayment).
Managing Your Student Loan Debt
Once you start school, you can defer payment on most loans until you are no longer in school. However, paying for them now during your education could help you to reduce the debt you owe later.
Once you are ready to start paying for your student loans, the lenders will set up payments for you. If the monthly payment is too high for you, you may be able to defer the loan longer due to financial hardship or, in some situations, consolidate the loan into a longer-term loan, which makes the monthly payments lower.
Loan Forgiveness and Cancellation Programs
Debt repayment plans are available for many borrowers. If you cannot make timely payments, you can work with the lender to restructure the debt.
There are a lot of scenarios in which loan forgiveness may be a factor. Some student loan programs, like the Public Service Loan Forgiveness program, will allow you not to repay the debt you owe if you work in a public sector job. You may also have your student loan debt discharged if you are determined to be totally and permanently disabled.
Seeking Professional Help
Debt repayment is complex because there are numerous student loan structures and requirements. As you navigate the options for your situation, it's often best to work with a professional debt counselor or advisor who can help you determine which repayment method best suits your individual needs.
The key here is not to ignore your debt but to seek help to reduce your debt or restructure payments to fit your budget.
Avoiding Student Loan Debt
You don't have to pay for your college education with a loan. Many people qualify for grants and scholarships to help lower their cost of education. Others can set up payment plans with their college to pay the debt over time rather than using a student loan. You may also qualify for need-based programs that help you reduce the education cost. Turn to the college admissions and financial aid office for more insight into the availability of these programs and how you may qualify for them to pay for your education.