Have you noticed all the attention on student loans lately?
To say there is some confusion and uncertainty would be an understatement.
I don’t have any better idea than you do about what may happen in the student loan landscape.
No matter what happens, the way I see it, you have two options .
The first option is to do nothing, get angry, and blame everyone else.
The second option is to take ownership, get prepared, and educate yourself about the student loan system so you’re ready for whatever comes next.
If you’ve chosen the second option, you’re in the right place. That means you’re determined to not let outside factors you can’t control hinder your progress towards financial freedom.
In this post, we’ll cover the basics about federal and private student loans so you can begin to make informed decisions to most efficiently eliminate your student loan debt.
Whether you are finishing up school or currently paying off loans, this is a good place to start. No matter how the student loan landscape changes, it’s a fair bet that these basic concepts will remain in place.
In the end, paying off student loan debt is really not that different from paying off any other form of debt. However before we start playing the game of conquering student loan debt, we need to understand some key ground rules.
Let’s dive in.
Student loan debt is a major obstacle to reaching financial freedom.
Student loan debt is one of the major obstacles for people striving for financial freedom. That makes sense given that more than 42 million people in the United States currently have student loan debt.
It’s not just about the number of people who have student loan debt. It’s the dollar amount of those loan balances. In my opinion, I don’t see how someone can be truly financially free when burdened by student loan debt.
This is especially true for professionals with advanced degrees. According to the Education Data Initiative:
- The average person with a graduate degree owes up to $102,790 in federal student loan debt.
- 54.0% of all graduate school students have federal student loan debt.
- 55.2% of people with master’s degrees have federal student loan debt.
- 74.8% of people with professional doctorates have federal student loan debt.
- 76.2% of doctors have student loan debt.
It’s because so many of us rely on student loans to pay for school that there is no shortage of information available online. The problem is there’s so much information, it’s hard to know where to start.
Let me help you get started.
Federal loans are better than private loans.
The first thing to know about student loans is that there are two entirely different types: federal loans and private loans.
Federal loans are funded by the United States government. You can access the main federal student loan website at studentaid.gov.
Private loans are funded by lenders, like banks. Some of the most popular private student loan companies are SoFi, College Ave, and Sallie Mae.
When you hear about student loans in the news, you’re hearing about changes to the federal loan system. There may be some side effects for the private loan system, but the federal system is getting all the attention right now.
There’s no real dispute that federal loans have long been a better option for borrowers than private loans. Federal loans almost always offer the best rates and terms. Even the private loan companies admit as much.
The reason people have both federal and private loans is because federal loan amounts are capped. Once you’ve taken out all the federal loans you are eligible for, private loans become necessary to fill whatever funding gap remains.
With tuition costs rising for college and grad school, it’s likely you’ll leave school with both federal and private loans.
Understanding the available options and differences for each type of loan will help you eliminate your student loan debt as efficiently as possible.
What to Know about Federal Student Loans
Even with a changing landscape, below are the key aspects to keep in mind regarding federal loans.
With this background in mind, you’ll be better equipped to make adjustments to your student loan payoff strategy should that time come.
There are 3 main types of federal student loans.
There are three main types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
Direct Subsidized Loans offer the best rates and terms and are designed for undergraduate students with financial need.
The main advantage of subsidized loans is that the federal government pays the interest for the borrower for a certain period of time, like when the borrower is still in school. That could be major savings.
Direct Unsubsidized Loans are available for undergraduate and graduate students and are not restricted to students with financial need. However, the borrower is responsible for all the interest on the loan.
Your school determines which type of loan you are eligible for. Keep in mind there is cap to the amount you can borrow for each type of loan. We’ll discuss the caps in a moment.
Your credit score does not factor into Direct Subsidized or Unsubsidized Loans.
Unlike with private loans, Direct loans do not depend on your credit score. This is a key advantage of federal loans for people who have no credit history or poor credit history.
Direct PLUS Loans are available for parents and graduate students.
Direct PLUS Loans are for eligible parents and graduate and professional students.
The other main differences with PLUS loans relate to the amount you can borrow and the interest rate you’ll pay, as seen below.
Also, with PLUS loans, the borrower’s credit history is a factor considered during the application process. These loans are not available to people with poor credit.
Federal Loans are capped depending on the loan type and education level.
The amount you can borrow in federal loans depends on the loan type and education level (undergraduate or graduate/professional).
- As an undergraduate, you can borrow up to $12,500 in Direct federal student loans each academic year.
- As a graduate or professional student, you can borrow up to $20,500 in Direct federal loans each academic year.
- For PLUS loans, you can borrow up to the cost of attendance for your school minus any other financial assistance received.
With these caps in mind (besides PLUS loans), you can see how federal loans alone are usually insufficient to cover the full costs of higher education.
Federal loans offer the best interest rates and lowest fees.
As mentioned above, federal loans have long offered the best interest rates and lowest fees.
Rates are always subject to change. For illustration purposes, here are the current interest rates for federal loans:
| Loan Type | Level | Interest Rate |
|---|---|---|
| Direct Subsidized and Unsubsidized | Undergraduate | 6.53% |
| Direct Unsubsidized | Graduate/Professional | 8.08% |
| Direct PLUS | Parents or Graduate/Professional | 9.08% |
In addition to interest, most federal loans also include loan fees. These fees are taken out of the loan at the time the loan is first disbursed. That means the amount you’re borrowing and responsible for paying back is more than the amount you actually receive.
Loan fees for Direct Subsidized and Unsubsidized loans is currently set at 1.057%.
Loan fees for PLUS loans is currently set at 4.228%.
As you can see, even within federal loans, the interest rate and fees charged vary depending on the type of loan and level of education.
The federal government contracts with loan servicers to manage your loans.
The federal government will assign your loan to a loan servicer to handle billing and other services. When you need information or have questions about your federal loans, you’ll need to contact your loan servicer.
The federal government currently works with the following loan servicers:
Keep your loan servicer’s contact information close by, especially these days.
Your first federal loan payment is typically due six months after leaving school.
With federal loans, you will usually have a six month grace period after you leave school before your first loan payment is due.
Not all federal loans have a grace period, and interest usually will accrue during the grace period. You are allowed to pay this accrued interest before you enter repayment.
The federal government offers a number of loan repayment plans, for now.
The federal government offers a number of loan repayment plans.
At least, for now.
It’s anyone’s guess if these repayment plans will continue to exist and who may be impacted.
For up-to-date information on the available repayment plans, please visit studentaid.gov or contact your loan servicer.
So, what is a loan repayment plan?
Generally speaking, a standard repayment plan means paying your loans back in equal monthly payments spread over ten years.
In addition to the standard repayment plans, there are a number of plans currently available to reduce your monthly payment and extend your repayment term. These plans are typically based off of income level.
The idea behind most of these repayment plans is to help you pay back your loans while still affording your other monthly expenses.
Your loan servicer will work with you to determine the best repayment plan for your situation.
With federal loans, there should be no prepayment penalty if you accelerate your loan payments on your way to financial freedom.
One important note: regardless of the repayment plan you choose, you are still responsible to pay back the entire loan. If you choose a plan that offers lower monthly payments spread over a longer time period, you will end up paying more in total interest.
Loan Deferment, Forbearance, Forgiveness and Discharge
With federal loans, you typically have better options when you are struggling to repay your loans. Note that just because you may have more options does not mean you’ll be let off the hook.
Loan forgiveness may be available to people who work in eligible public service jobs who make loan payments for ten years.
Again, this may be all in flux.
For up-to-date information on the available repayment plans, please visit studentaid.gov or contact your loan servicer.
What to Know about Private Student Loans.
With a basic understanding of federal loans as context, it’s not too difficult to understand how private loans work.
The key here is that when it comes to private loans, there are more variables to consider. Lenders may have different rates, loan terms, and repayment schedules.
Be aware that private loans likely will not offer loan forgiveness and may involve additional fees and potential penalties.
The best thing you can do is to compare the various options for private student loans. A good place to start is with three of the most common private lenders:
Each of these lenders provides detailed information on its websites. Even if you don’t choose any of these lenders, you can still do your homework on their websites.
Besides just the interest rate on a potential loan, pay attention to other important factors like:
- Loan fees
- Repayment options
- When the first loan payment is due
- Prepayment penalties
- Consolidation options and fees
- Quality of service and responsiveness
In the end, you’ll likely find that most private loan lenders offer comparable rates and terms. They are competing with each other for your business, after all.
Where are you in your student loan journey?
Ultimately, only you are responsible for your loans. You can blame everyone else for the changing landscape or you can educate yourself and make a plan.
Whether you are finishing up school or currently paying off loans, this post is intended to provide student loan basics that should hold true no matter how the student landscape changes.
Now that you understand the basic ground rules, you can work on a plan to pay off your loans as efficiently as possible on your way to financial freedom.
Where are you in your student loan journey?
Do you know anyone who would benefit from taking about student loan basics?
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