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The Basics Of Student Loans

So you’ve decided to take the path of higher education, hoping that a college degree will pay off financially in the long run and also bring career fulfillment. To make it happen, you’ve also decided to take out a student loan to help pay for that education – and with good reason:  According to the College Board, tuition and fees totaled an average of $38,070 at four-year private, nonprofit universities during the 2021-2022 academic year.

A student loan can help cover the expenses of post-secondary education, including tuition, living costs while at school, books, and fees. While type of loan can help you afford the college of your choice, keep in mind that a student loan must eventually be paid back – with interest.

Read on to learn about how student loans work, the different types of loans, and how much you can expect to borrow.

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Intro To How Student Loans Work

Before you apply for a student loan, check to see if you qualify for government grants or scholarships. The Free Application for Federal Student Aid (FAFSA) asks for detailed financial information from the student, and oftentimes the parents as well. If you don’t qualify for financial aid, you may want to consider a student loan.

Students loans are offered by the federal government or private lenders. Federal student loans can include benefits such as interest waivers, payment freezes, and loan forgiveness, depending upon your circumstances after graduation. You won’t have to start repaying a federal student loan until after graduation. Private loans come with higher borrowing limits but also competitive interest, and some private lenders require  loan repayment to begin while the student is still enrolled in school.

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Which Type Of Student Loan Is Right For You?

If you’re looking to take out a federal student loan, the amount you can borrow will be determined by both your year in school and whether you are dependent on your parents. In addition, financial need may be considered.

Undergraduate students generally have access to loans ranging from $5,500 to $12,500 per academic year; grad students may qualify for up to $20,500 annually. Lifetime federal student loan limits for undergraduates are capped at $57,500, and $138,500 total for graduate or professional students.

If you’re looking to go the private loan route, note that private student loan amounts are awarded based on the lender’s assessment of your ability to pay the loan back.  Whether you opt for a federal or private loan, you’ll have several options from which to choose.

  • Direct Subsidized Loan – Available to undergraduates; credit check required; based on financial need; government pays your interest while you’re in school and for six-month grace period after leaving school. Payments begin six months after graduation.
  • Direct Unsubsidized Loan – Available to undergraduates, graduate, professional students; no credit check required; not based on financial need; interest is accrued even during student career and payments begin six months after graduation.
  • Direct Plus Loan– Parent Plus Loan – Available to parents of undergraduates; no credit check required; not based on financial need; interest is accrued all along; payments begin when loan is given.
  • Private Loan – Available to all students or parents; credit check required; not based on financial need; interest is accrued immediately.

A federal student loan comes with several different types of repayment options, while private loan repayment terms are determined by the lender. If you find yourself struggling to repay your student loans, you can request forbearance or deferment, which can postpone payments on your student debt for up to 36 months, during which time interest will likely continue to accrue, adding to your overall student loan debt.

Student loan repayment options include: a standard, graduated, or extended repayment plan. 

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Standard, Graduated, and Extended Repayment Plans

Available to all borrowers, a standard plan includes fixed payments with the goal of paying off the loan within a 10-year period.

All borrowers can also take advantage of a graduated plan in which payments start low, then increase every two years so that the loan is paid off in 10 years.

Borrowers who owe more than $30,000 in direct loans have the option of making fixed or graduated payments so that that loan is paid off within 25 years.

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Pay-As-You-Earn (PAYE) and Revised Pay-As-You-Earn (REPAYE) Repayment Plans 

Available to all direct loan borrowers, PAYE requires monthly payments that amount to 10% of discretionary income, but won’t ever exceed more than you would be paid under the standard repayment plan. Payments are recalculated annually taking into consideration income and family size. After 20 years, outstanding balances are forgiven.

Direct loan borrowers make monthly payments limited to 10% of discretionary income; payments are recalculated annually based on income and family size. The government will forgive the debt after 20 years for undergraduates and 25 years for graduates.

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Income-Contingent and Income-Based Repayment Plans

Direct loan borrowers can choose between monthly payments that are the lesser of 20% of discretionary income or the amount that would be required on a repayment plan with fixed payments, adjusted for income, over 12 years. Annual recalculations can change the payment amount; after 25 years, any outstanding balance will be forgiven.

A good choice for borrowers with high debt-to-income ratio, this plan is based on  monthly payments that amount to either 10% or 15% of discretionary income, but are never higher than payments that would be made under the standard repayment plan. Annual payment recalculations take into account income and family size. Remaining balances are forgiven after 20 or 25 years, depending on when the loan was originated.