Are student loans being a part of your life?
So, 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 counselings 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, et cetera.
For most of us, the makeup 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.
Private loans 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. Private loans 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 the reason is that the interest rate is fixed and does not depend on the credit score.
And most importantly, for federal loans, there are many options to repayment and even postponement in terms of financial difficulty.
So now that we understand the types of student loans that are generally available to us, it’s important to consider all of our options when repaying our loans.
Obviously, many of us are going to get into a regular payment plan with our various loans where we’re meeting some amount, hopefully, higher than the minimum, to help chip away at the principal, as well as the interest, in as reasonable away as we can while balancing our other financial goals.
But there are many other nuanced options when it comes to repayment plans over the course of your adulthood. For example, with private student loans, you can start repaying them while you’re in school, which can potentially save you thousands of dollars in the long run.
After graduation, you’ll start to make principal and interest payments every month. The amount that you’re paying every month will be determined by a few factors, things like your interest rate, accrued interest, principal balance, and the terms of your repayment. The longer the term, the lower the payments, but likelier the more you’ll end up paying in the long term because you have a longer period for that interest to accrue.
Some private loans do have other options, like forbearance, if you can’t afford to make payments or deferment for things like grad school or internships. But those will depend on the lender and the loan.
Private student loans also offer you the option to refinance, as mentioned before, which can allow you to change the interest and the terms of your repayment, possibly to your benefit. But you’ll need a pretty good credit score in order to be able to do this.
As for public student loan repayments, there are also a few good options. One great advantage is that you can change your repayment plan at any time with no penalty, meaning if circumstances change, you can adjust your student loan repayment to reflect on what’s possible for you. You can have a standard repayment plan, which is a fixed amount that guarantees that your loan is paid off in a certain amount of time.
You can have a graduated repayment plan, wherein your repayment plan starts off with a lower monthly payment and gradually goes higher and higher. This is in tandem, usually, with higher earning potential. You can have an extended repayment plan, which can lengthen the amount of time you have to pay back the loan.
And there is also income-based repayment, where what you’re paying and how you’re paying it is based on your income. And these types of plans is the best options for people seeking public service loan forgiveness. And what is the PSLF that you may have heard so much about? Basically, it’s a special program where, if you work full-time for a qualifying employer, your direct loan balance will be forgiven after you’ve made 120 qualifying monthly payments, likely under the pay-as-you-earn or income-based repayment programs.
These are generally government jobs. And we’ll link you guys to a specific list of the jobs that will qualify for this program. And you should absolutely apply for this program if you believe that you’re qualified for it.
But do remember that it’s easier said than done getting into it. Only 206 applicants for PSLF out of 49,669 applications in 2019 actually got their loans forgiven. If you need to take out student loans to pay for college, that’s totally normal and something many of us will decide is in our best interest to do in the long term.
But what you must avoid at all costs is that really tricky the perception that we all tend to have in college that this is just imaginary money, and you won’t really have to worry about it until you’re some distant version of yourself in the future.
Take it from me, a grizzled, withered, disintegrating 31-year-old. Life comes at you a lot faster than you think. And you very soon will be making those payments you signed up for. So you want to make sure that not only do you understand the agreement you’re entering into, you’re making the agreement that works best for your life. Know your options. Know the difference between different types of loans.
And remember that student loans are not free money. They are very much expensive for money. Don’t forget to check out the next episode in our guide to getting good with money for college students. And for all things talking about money, don’t forget to check out our blog.