College is becoming increasingly expensive. Accordingly, the most common method of financing and accessing higher education for high school graduates is student loans. Student loans can be used to pay off expensive tuition and college fees but must be paid back, typically with interest. Unlike traditional loans, you don’t need to pay these off right away, rather you can wait until after graduation to begin your repayments. 

Federal and Private Loans

There are two types of student loans: federal and private. Federal student loans offer lower interest rates than private loans and some even don’t charge interest until you graduate. Unfortunately, federal student loans are capped at a certain amount, so many students may not be able to pay off all of their tuition if paying full price. Private student loans are helpful in paying back the rest of the remaining costs after federal loans.

A general rule is to always start off with federal loans because of their numerous benefits to students. For example, they offer a fixed interest rate, which indicates a non-changing rate throughout the life of the loan, as well as an income-driven repayment plan, which can be further explored in sites such as the federal student aid website, and will be further explored in the later sections. 

Most federal loans do not require a credit history from the student when applying for loans. This is because a credit history shows your reliability in paying back debt. Since you are a student, you probably have never assumed debt before so you don’t need a history check. Federal student loans are capped, thus parents can also take out money for their children, known as a federal parent loan or a Direct PLUS Loan which we will dive into in the next section. 

Types of Federal Loans 

There are three types of federal student loans. Direct Subsidized Loans are for undergraduate students with demonstrated financial need. The government pays the interest while you’re in school. Direct Unsubsidized Loans are available to both undergraduates and graduates. There is no need to demonstrate financial need, but you are responsible for paying all the interest. Finally, there are Direct PLUS Loans which are for graduate or professional students and parents of undergraduate students. These loans require a credit check so undergraduate students are not included.

To apply for federal student loans, you need to complete the Free Application for Federal Student Aid (FAFSA). The government and schools use the FAFSA to determine your eligibility for financial aid, including federal loans, work-study programs, and grants. There will be another article posted about FAFSA on the Trailblazer soon.

Repayment

There are many planning structures for repaying your federal student loan debt. Standard repayment consists of fixed payments over 10 years until all debt is paid off. A basic idea of income-based repayment plans consists of payments that are capped at 10 to 15 percent of your discretionary income (income remaining after deduction of taxes, other mandatory charges, and expenditure on necessary items) until all debt is paid off. 

Pay As You Earn plans consist of monthly payments that are based on income with debt forgiveness after 20 years. Public service loan forgiveness is a plan in which after 10 years of qualifying payments the remaining balance is forgiven while working in a public service job. Most special repayment structures (not standard repayment) need to be qualified for by demonstrating partial financial hardship or income-based need. 

Advice and Conclusion

You should always try to pay off your debt as fast as possible. Debt will compound quickly and you will definitely have to pay more than you have borrowed. The best way to get rid of that excess debt is to pay it off quickly and decrease the time you gain interest. Financing college is a difficult endeavor, and hopefully, this article helped you get started! There are many different types of loans so make sure you do your research and find one that suits you and your financial situation. 

Sources:

https://studentaid.gov/

https://studentaid.gov/plus-app/

https://thestudentloanlawyer.com/student-loan-basics/ https://thestudentloanlawyer.com/federal-vs-private-loans/