Student loans are an important way for both undergraduate and graduate students to pay for their college education. While a loan means that the money is borrowed and must be repaid, usually with interest, almost every student takes out a loan to help them get the education they need to enter the workforce and find a great career.
The cost of one year of undergraduate education in 2019 ranges from more than $9,000 per year for in-state students to more than $58,000 every year for students attending out-of-state or private universities. These estimates do not include the cost of education-related expenses, like food, textbooks, and housing.
Even if you or your parents have money set aside for college, that money is not likely to cover the cost of your entire university career. While there are all kinds of scholarships and grants available for students with great academic success, specific skills like playing an instrument, excelling at a sport, or that are based on financial need or merit, these options will likely not cover four years of undergraduate education (not to mention potentially attending graduate school).
When you apply for financial aid, the college or university will often help you find loans, along with other sources of financial help like scholarships or grants. Almost all students qualify for student loans, but it is important to understand the source of the loan, repayment options, and the terms and conditions of the loan.
There are generally two types of loans: those given by the federal government and those provided by private organizations. Both types of student loans have benefits and detriments, so learning more about the sources of your money can help you determine what kind of loan works best for you.
How Student Loans Work in 2020
General interest rates for federal student loans in 2020, regardless of source, range from 4% to 7%. These rates may adjust up or down over time, depending on the economy.
No matter when you take out a loan for college, the interest rate means that you will pay back more over time than you initially borrowed. If you spend several years repaying the loan in small payments, the upfront amount may be affordable for you, but you will end up paying thousands of dollars more than you originally borrowed because of compounding interest. This means you will be in debt for longer.
Understanding the types of loans available to you can help you make smart financial decisions, so you get the best education and career experience possible.
There are two basic types of student loans available for college, university, or trade school: federal loans and private loans. While federal loans are generally considered more forgiving, there are several benefits to private loans.
These types of loans come from money provided by the federal government. The terms are set by law rather than an institution that might be a for-profit company.
The amount of money you can borrow from the federal government depends on whether you’re an undergraduate, graduate, or professional student, or if you are the parent of a college-bound student.
There are four different types of federal loans, and these also vary in how much money you can get through the loan. The vast majority of all student loan debt in the United States is through federal loans.
Benefits for taking a federal student loan over a private loan include the following:
- Lower, fixed interest rates keep your payment plan simple
- No need for credit checks, except for PLUS loans
- No need for co-signers or guarantors
- Repayment does not begin until you have completed college or you drop below half-time student status
- If you demonstrate financial need when repayment begins, the government can pay part of your interest
- More flexible payment plans and loan deferments or other ways of postponing loan payments are available
- Some jobs offer forgiveness for part of your loan
- There are no penalties for prepaying on the loan
Applying for a federal student loan begins with filling out the Free Application for Federal Student Aid (FAFSA). This is financial information that will help your college determine your financial need, so they can offer various forms of assistance ranging from federal grants or scholarships to student loans.
Types of federal loans are:
- Direct subsidized loans. These loans are given to undergraduate students who demonstrate clear financial need to help them cover the costs of their education. The need may stem from coming from a low-income family, being dependent on a single parent with low income, or other financial issues.
Undergraduate students with direct subsidized loans can borrow as much as $5,500 to $12,500 per year, depending on what year they are in school and their dependency status. With direct subsidized loans, the U.S. department of pays the interest while you’re enrolled in school at least half-time, during the six-month grace period after graduation, and during any deferment periods.
- Direct unsubsidized loans. These can go to undergraduate, graduate, and professional students. Eligibility is not based on financial need.
Graduate and professional students can borrow up to $20,500 per year. Undergraduate students can borrow up to $12,500 per year. Unlike subsidized loans, direct unsubsidized loans start accruing interest immediately and will continue to accrue while you are in school, during the grace period, and during any deferment or forbearance periods.
- Direct PLUS loans. Graduate and professional students are qualified for these loans, along with parents of undergraduate students. PLUS loans are specifically designed to cover education-related expenses that are not covered by other forms of financial aid.
A credit check is required. Anyone with an adverse credit history, like a history of bankruptcy, will be disqualified from this loan.
- Direct consolidation loans. If you have several student loans, this form of federal loan allows you to combine all of them, so you make one student loan payment with a single student loan servicer.
The standard repayment period for most federal loans is 10 years, with payments remaining the same throughout the repayment term. However, if you decide to change your payment plan or consolidate your loans, your repayment plan can be extended up to 30 years. Switching to a graduated repayment plan can also change the consistency of your monthly payments, with payments starting smaller and gradually increasing over time.
This type of student loan comes from a private provider, such as a bank, credit union, state-based or state-affiliated organization, or a company that specializes in providing student loans.
Terms and conditions for these student loans can vary widely because the lender, rather than lawmakers, sets the criteria. In some cases, this competition can be to your benefit as a student.
While private loans are typically more expensive than federal loans, with stricter repayment schedules, there are good options for many students in 2020.
Private loans may:
- Require repayment of the loan to begin while you are still in school, although there will likely be deferment options
- Offer low payments. If you begin repaying while you’re still in school, monthly payments can be as low as $25, or you can choose to pay only the interest until you graduate.
- Have either variable or fixed interest rates. You can find an interest rate that starts lower than the federal options.
- Require a credit check and either a co-signer or guarantor. These can sometimes be good ways for you to understand your own finances and ability to repay the loan.
There are additional things to keep in mind about private loans:
- Loan interest is not subsidized, but it may be tax-deductible, depending on the loan.
- While this student loan cannot be consolidated through a federal direct consolidation loan, it can be refinanced if you need a better interest rate.
- Different contracts will have different options regarding repayment schedules and lowering your loan payment based on need. You can sometimes negotiate these terms.
- There may be a financial penalty for prepaying some of the loan. You can instead set this money aside in a savings account so you can start paying the loan on time.
- State agency loans may have forgiveness or partial forgiveness options.
- Nonprofits offer loans with greater flexibility and repayment options, although they will be more exclusive regarding who can take out the loan.
In general, the interest rates and terms of a private loan will be more likely to change if the organization decides to change its terms. But the flexibility of several of these loans means you have more power to work with the institution and figure out an interest rate, payment plan, and other options that suit your needs better.
You must pay attention to the loan and any changes to the contract that occur. For many students, the ability to adjust through refinancing, find a lower initial interest rate, and set specific repayment options that work best for them means they have greater financial freedom during and immediately after they complete school.
Private loans are also a great option to cover financial gaps that are not covered by federal student loans.
Find Options to Repay, Forgive, and Consolidate Student Loans
For undergraduates in the 2019-20 school year, the average interest rate on federal student loans across the nation is about 4.53%. This is the calculated federal average, so it is important to note that private loans can vary much more than that. Interest rates on other types of loans can vary as seen below.
- Private student loans have a fixed rate of 4.55% to 13.98% and variable rates ranging from 3.75% to 13.19%.
- Refinanced student loans may have a fixed interest rate of 3.29% to 8.07% and a variable interest rate of 2.43% to 7.79%.
- Federal loans for graduate students have a fixed rate of 6.08%.
- PLUS federal loans have a 7.08% fixed rate of interest.
The 2019-20 federal student loan rate went down from 5.05% in 2018-19. Other federal interest rates have also decreased in the past year, so now may be a great time to go back to school.
Before deciding to get your bachelor’s or graduate degree, you should check with various online repayment estimators to determine if you are in a position to repay a loan in 10 years or less. This helps you determine the types of student loans you should pursue and what types of repayment plans you may need.
If you want to get a college education but the standard repayment plan options over 10 years do not work for you, there are some other methods of managing your student loans:
- Employers: If you have federal student loans, some employers offer repayment programs as part of their employee recruitment or retention benefits. This is implemented through 5 U.S.C. 5379, a law that authorizes approved agencies to set up their own repayment program options, which can help them find and keep highly qualified candidates.
- Forgiveness: Some jobs allow you to stop paying your loans altogether due to the nature of your employment. This means your career has led to loan forgiveness. People who take jobs that entirely forgive their student loans typically need to remain in that job for a specific time period, like five years. Student loan forgiveness is sometimes also called student loan cancellation.
- Discharge: While student loan discharge may look like forgiveness or cancellation, the terms of discharge typically have nothing to do with your career. Instead, if you are totally and permanently disabled so you are unable to work, or if the school that managed your loan closes, you can be discharged of responsibility to repay the loan. In very rare cases, declaring bankruptcy can also discharge your student loan debt.
- Consolidation: If you have several federal student loans, like some for undergraduate and some for graduate school, you may be able to use the federal loan consolidation program to compile all your student loans into one big loan with a different interest rate and payment plan. Your new interest rate will be the weighted average of the interest rates on your initial loans, rounded to the nearest one-eighth of one percent, and fixed for the life of the loan.
You will make only one monthly payment to one organization instead of several. This is convenient, but it is not designed to save you money in the long term. Private lending institutions allow you to combine and refinance your student loans, which is different from the federal loan consolidation program.
- Refinancing: This option is designed to lower your interest rate. It may involve combining some loans, but the goal is to spend less money rather than creating more convenience. Private and federal loans can be refinanced for a lower interest rate, and part of refinancing may mean combining some of your student loans, so you pay only one monthly bill.
This option depends on how many student loans you have. For example, you may be able to combine and refinance your undergraduate loans for a lower interest rate, but not combine those with your graduate school loans.
What the Student Loan Crisis Means for Your Education in 2020
Numbers from the Treasury Department in 2019 reported that as many as 44.2 million Americans carried a total of $1.48 trillion in student loan debt. This was not the debt total for working-age adults in the U.S.; it just included debt accrued while going to school.
The average graduate student, upon graduation, had $39,400 in debt from attending school for higher degrees. While more education should mean better paychecks and benefits, this is increasingly not true as more people flock to school.
The student loan crisis is primarily fueled by two factors: the rising cost of education and the difficulty recent graduates face when entering the job market. Too many students have agreed, prior to entering their freshman year of college, to a lot of debt in the form of loans without understanding the risks from interest rates, the differences in how loans work depending on if they are private or federal, and how much ability they have to discuss the loan’s terms with the granting organization once they have a job or if they struggle to find employment.
About 11% of student loan borrowers were 90 days, or three months, delinquent on paying their loans. This can hurt their credit score and lead to other serious problems with the law and their finances. It is likely that many of these people have no way to pay their loans or to pay more than the interest payment, but they have not discussed the loan’s terms with a bank manager or another officer who can help them.
While changing laws and better jobs can certainly help to alleviate the student loan debt crisis, it is important for you as an individual student to be cautious about how much money you borrow. This includes understanding the terms of a student loan. Accruing interest will affect your income for years as you repay student loans regardless of their source.
You may also consider following a career path that allows forgiveness for these loans or finding an employer willing to pay them off for you over time.
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