Student loans are no joke. With college prices on the rise for over two decades, there’s no surprise that student loans are a necessity in many college students’ lives. But how exactly do they work? If you’re like most college students, financial literacy probably isn’t your highest skill set. Terms such as “subsidize,” “interest rates,” “repayment” and “refinancing” all sound like a jumbled mess if you don’t understand their meanings. Understanding federal student loans shouldn’t have to be daunting, so we’re here to break down the basics.
Here’s the run-down of your pressing student loan questions.
What types of federal student loans are there?
Direct Subsidized Loans
Direct subsidized loans are available only to undergraduate students who demonstrate a financial need. When you take out a subsidized loan, the federal government pays the interest that accrues while you’re enrolled in school, during any semesters you defer and for six months after leaving school. This grace period allows students to find jobs before having to pay their debt.
Direct Unsubsidized Loans
Unlike subsidized loans, all students qualify for direct unsubsidized loans and don’t need to demonstrate financial need. However, if you take out an unsubsidized loan, interest begins to accrue immediately while you are still in school. Because interest on the loan accumulates while you’re still in school, unsubsidized loans cost more than subsidized.
Direct PLUS loans
The Direct PLUS loan is another unsubsidized loan offered specifically to parents of students. If your parent wants to take out a Direct PLUS loan, they must fill out a separate application and agree to a credit check.
How do I know which federal student loans I qualify for?
To qualify for federal student loans, you must fill out the FAFSA, which stands for Free Application for Federal Student Aid. As it says in the name, students fill out the FAFSA online for free, so there’s no harm in applying. Students should fill out the FAFSA as soon as they can after it opens on October 1. You’ll want to file early, especially if your school uses priority deadlines. Filing before priority deadlines – often December 1 – helps ensure you receive the maximum consideration for grants, scholarships, work-study and loans.
What happens after I apply for federal loans?
After a few months, you’ll receive a financial aid offer from your school. Most schools send financial aid letters through the mail, but some also offer online portals with your financial aid information. “Many community colleges and private colleges start sending out Financial Aid Offers within a couple months of the FAFSA opening. State colleges often send out financial aid offers much later because their tuition and fees depend on the state budget,” Iowa State University Financial Aid Advisor Brittany Peterson said. If you are approved for federal loans, you may be selected for federal verification. This means your school will collect some of your tax information before you can take out your loan. It’s important that students pay attention to communications from their financial aid office so important documents are turned in on time.
What if my federal student loans don’t cover my tuition?
After you’ve exhausted scholarships, grants, work-study and federal loans, you’ll want to look into private loans. Private student loans are unsubsidized with greater interest rates. Private loans typically also require credit checks and a co-signer. These should be your last option for financial assistance, as they cost the most in the long run. “I would always recommend that students limit borrowing as much as possible and only borrow for things they need, then use something like a student job to help pay for other personal expenses,” said Kelsey Ryder, associate director of financial literacy and counseling at the University of Iowa. Picking up a part-time job over the summer or throughout the school year can help cover your everyday costs.
I’m almost done with school. How do I start repaying my student loans?
First, collect your loan information – the balances, interest rates, repayment options, etc. – and organize. Find your federal student loan information at studentaid.gov or reach out to your private lender. If you took out a subsidized loan, you’ll receive the six-month grace period before starting repayments.
The best way to stay on top of your loan payments? Make a plan. “The best way to get started is to know your numbers … Record how much income you take home per month and list out your fixed and average variable expenses per month. This will help you understand what you can afford when your student loan payment comes due,” Certified Student Loan Professional Meagan Landress said. Then, set financial goals for yourself and work on your plan to get your loans paid off.
How long will it take to pay off my federal student loans?
Most federal student loans use a standard 10-year repayment plan. In the standard repayment plan, graduates pay a fixed amount each month. If you choose this plan, you’ll pay less interest over time. You can also choose the graduated repayment plan, which also allows for 10 years of payments. In this plan, payments start at a lower price and increase every two years. However, you will pay more in interest over time than on the standard plan. If you’ve borrowed over $30,000 in Direct Loans, you may choose the Extended Repayment Plan which allows up to 25 years of payments.
Federal student loans also offer multiple income-driven repayment plans. In these plans, your income determines your loan payment amount. Depending on which plan you choose, the repayment takes anywhere from 10-20% of your monthly discretionary income.
What about refinancing my student loans? Is it worth it?
This depends on the type of loan, repayment plan and individual circumstances. Interest rates shouldn’t be the only factor to consider when looking at refinancing. If you qualify for income-driven plans or loan forgiveness opportunities through the federal system, refinancing may hurt your costs in the long run. However, if you already have private loans, refinancing may help reduce your interest rates. “Refinancing is a permanent decision, so make sure that’s the right move before pulling the trigger,” Landress said. If you’re not sure which option is best for your circumstances, speaking with a financial expert can help cut through the confusion.
Whichever federal student loan you choose, make sure to think ahead—graduation and repayment come faster than you expect. Consider working with a financial advisor if you need an extra hand. Don’t panic: one day you’ll pay off your loans.