the time has come in our guide to getting good with money to talk about the thing that none of us really want to talk about, which is student loans.
If student loans are a part of your life, at least take solace in the fact that you are very far from alone.
Of the class of 2019, 69% took out loans of some kind, with an average debt burden on graduation totaling just shy of $30,000.
For the vast majority of students, college loans are a reality they must face.
And it’s better to know what you’re getting into before you find yourself
at the end of the college experience.
For most of the loans available to you, you will have to do something called an exit counseling session, where you will have to read about your loan and answer questions about it, usually around things like the terms of the repayment, to make sure that you understand what you’re getting into.
But many of us just don’t take those exit counseling seriously or, even if we do, they’re often too little, too late.
And no matter where you are in the student loan process– i.e., even if you’ve already taken out student loans– it’s never too late to learn more
about what that really entails.
And if you’re in a place where you have the option to take out potentially less in student loans in the future or even sometimes avoid them altogether,
it’s really important to know your options.
So first, it’s important to understand what student loans actually are.
For most college students, student loans are just one part of an overall financial package that will often entail other categories, like grants,
scholarships, merit-based awards, work-study programs, etc.
For most of us, they make up part of the pie of how we’re financing college
and hopefully, for many of us, not the overwhelming majority.
In most cases, you will not need to start paying back your student loans immediately.
But you should very much keep in mind when you are expected to start repaying them and keep that date clearly in your other financial planning,
as well as, in many cases, your life planning.
For a lot of us, it will be something like six months after graduation that repayment starts kicking in.
But there are other ways to defer the loan repayments– more on that later.
So then comes the question of what kind of student loans you have.
There are two main types of student loans that you can take out, private loans and federal loans.
Private loans are any loans given by a lender other than the government,
including businesses, banks, credit unions, and the school you’re attending itself.
The terms of the loans are set by the lender and can vary widely between different loan providers.
Private loans can have variable or fixed interest rates, which means that your interest rate can be dependent on yours or your parent’s credit score or other co-signers.
They are also typically unsubsidized, which means that you’re responsible for all the interest that accrues on your loan, including the interest that accrues while in school.
Also, they are taken out with a set repayment term, usually anywhere from five to 20 years, and are typically not eligible for student loan forgiveness programs or government-backed repayment programs designed to lower your monthly cost.
And again, keep in mind that private loans can have interest rates that can change over the course of your loan repayment.
You might start with a very low 3% interest rate only to find yourself
paying a double-digit 13% after a few years.
For comparison, federal student loan interest rates for undergraduate students are usually no greater than 5%.
Lastly, additionally, private loans can be refinanced, meaning you can try to get a lower interest rate, depending on your score, salary, and other factors.
They can be a gamble that you can win or lose.
Then you have the public/federal loans.
As their name implies, federal loans are loans funded by the federal government.
There are three types of federal student loans for undergraduates– direct subsidized loans, direct unsubsidized loans, and Direct PLUS loans for parents.
Subsidized means that the government pays the interest that accrues on your loans while you’re in school or deferment.
Unsubsidized loans accrue interest that you will eventually have to repay, even while in school.
PLUS loans are taken out by your parents and are repaid by your parents even though they’re taken out for you.
To get federal student loans, you have to fill out a FAFSA form, or a Free Application for Federal Student Aid– important to remember that all federal student loans have a fixed interest rate.
Currently, that fixed interest rate for undergraduate is 4.53%.
Also, except for PLUS loans, you do not need to submit to a credit check for a federal loan because the interest rate is fixed and does not depend on your credit score.
Most importantly, for federal loans, there are many options to you for repayment and even postponement in terms of financial difficulty.