Borrowed Money: Student Loans
While the words “student loan” and “loan debt” frighten many students, the truth is that student loans can be useful in funding an education. The key is to be a smart borrower:
You Don’t Have to Take All the Money
Your financial aid package will include a loan amount, but you don’t have to borrow that much. In fact, you should try not to. Think of this number as your limit, not your starting point.
You Can Borrow Some Now and Some Later
You won’t cut yourself off if you borrow only part of your loan amount now. Let’s say you decide to borrow half and see how far it will take you. If you hit a financial crunch before your school year ends, you can always go back and borrow some or all of the remaining amount.
Take Your Time Deciding
Most schools give you until May 1 to accept your award package. Use that time to continue seeking scholarships and to make a budget. Challenge yourself to trim your living expenses so you can reduce your loan debt.
Think About How You Spend
Once your loan money hits your bank account, you might have an urge to spend it. But keep in mind that the standard term of a student loan is 10 years. That pizza you’re about to order—do you really want to be paying for it, with interest, 10 years after you graduate?
Pay Off Faster and Pay Less
Student loan repayment isn’t like other bills—you can pay ahead on loans and save money. When you get your cell phone bill or your electricity bill, you pay the amount owed for that month. If you pay more, you’ll get a credit on your next bill, but the total you pay over time will be the same. When you’re paying off a loan, however, you can cut the total cost by making more than the minimum monthly payment. That’s because interest continues to accrue as you’re paying off the loan. The faster you pay it off, the less interest will accrue. Here’s how big a difference you can make: The average student loan borrower in Iowa would shave a full year off a 10-year federal loan by paying $27 extra a month. There’s no penalty for paying off federal student loans early.
Pay Interest While You’re in School
If your loan accrues interest while you are in school, you can cut the total cost of your loan by making interest payments while you are still in college.
Help Is Available
If you run into financial hardship, you can apply for deferment, discharge or forgiveness of your federal loans.
Not sure who your loan servicer is? You can find out at My Federal Student Aid.
Types of Student Loans
Student loans are available through the U.S. Department of Education as well as private lenders. Generally, federal loans offer better terms and more repayment plans, but even federal loans differ. We recommend that students exhaust their loan opportunities in this order:
1. Subsidized Stafford Loans
Federal loans for borrowers with financial need, determined by FAFSA. The government pays interest as long as you are in school. Loans come due six months after you leave school or drop below half-time.
2. Unsubsidized Stafford Loans
Also federal loans, but not based on financial need. You are responsible for all interest charged throughout the life of the loan. Loans come due six months after you leave school or drop below half-time.
3. Direct PLUS Loans
Federal loans available to parents of dependent undergraduates. Repayment begins immediately, although your parent can request postponement as long as you are in school at least half-time. If your parent is denied, you might qualify for additional unsubsidized loan amounts.
4. Private Loans
Offered by banks, credit unions and other providers are not federally insured and might be more costly than federal loans. Carefully evaluate the terms and conditions of private loans before you apply. If you have concerns about a private loan, contact the Consumer Financial Protection Bureau’s private student loan ombudsman: consumerfinance.gov or 855-411-2372.
If you take out federal student loans, you’ll have multiple options for repayment plans:
Your monthly payments will stay the same until your loan is paid off.
Monthly payments will increase at specified times, usually every two years.
Your monthly payment will be a percentage of your income.
Which One Is Right?
There is no one best repayment plan. The fixed plan is the default for federal loan repayment, but don’t take that as a recommendation. It’s an automatic pre-selection that doesn’t take your situation into account.
A graduated payment plan makes sense if you can count on your income rising steadily during your repayment period. An income-based plan might be best if you don’t plan to enter a high-paying job. It also provides some buffer if you don’t land a job right away, and your loan might be forgiven after a specified time. A shorter repayment plan will cost more each month for now but will save you money in the long term.