Understanding Student Loans and Repayment Options in 2024

by Jalen
Student loans and repayment options

If there’s anything nearly as ubiquitous with the college experience as stress fueled late-night cram sessions, its student loans. If you’re like the millions of other students out there, you’ve probably heard horror stories about people drowning in debt, but maybe you’re not entirely sure what it all means for you. Student loan debt is a reality for many, and it can have a lasting impact on your life well after you toss that graduation cap in the air.

We’re going to demystify the world of student loans by covering everything from the types of loans available to you, to the terms you need to understand, how to start paying off student loans, and even some strategies for debt relief. By the time you finish reading this, hopefully you’ll be equipped with the knowledge you need to make decisions that are best for your situation. So, grab a coffee and let’s get into it!

I. The Landscape of Student Loan Debt

What is the student loan crisis?

The student loan crisis refers to the staggering amount of outstanding student loan debt in the U.S. As of the time of writing this post, the total amount of student debt in America is $1.77 trillion (yes, with a “T”!). If you have a substantial amount in student loans, this can drastically affect your ability to afford a house or a new car. This is because your student loans are considered when banks or others lenders look at your debt-to-income ratio. Many often find themselves needing to delay major life events because of the hefty monthly payments.

Beyond the individual level, there’s the larger economic ripple effect. With so many people strapped with debt, there’s less money being pumped into the economy. Instead of spending on goods, services, homes, or starting businesses, a huge chunk of money people earn goes right back into paying off these loans.

So, yeah, the student loan crisis is a big deal, both for you, me, and for the country as a whole. Understanding your options and making informed decisions about borrowing and repayment is more critical than ever.

Why does student loan debt matter to me?

Student loan debt also can shape some of the most significant decisions you’ll make. If you’re pursuing a degree in a low-paying field, the amount of debt you’d acquire may be too substantial. Seeking degrees in higher demand professions could be your best bet if you don’t have a heavy passion for your future career path.

Life only gets more real after graduation. Understanding how to minimize and effectively pay down your debt is an essential skill one would need in order to make the first steps toward financial freedom later in life.

II. Types of Student Loans

What are federal student loans?

Federal student loans are loans provided by the U.S. government. They often come with better terms than private loans, like lower interest rates and more flexible repayment plans. There are 2 classes of loans, Direct loans and PLUS loans, of which they both have 2 different types:

Direct subsidized loans are great because they do not collect interest while you’re in school, if you’ve deferred your loan, or during your grace period (6-months after graduation). However to qualify you need to have demonstrated financial need.

Direct unsubsidized loans automatically start accumulating Interest from the moment you take out the loan. It’s like ordering a pizza and realizing they charged you from the moment you first thought about pepperoni. These are for students without demonstrated financial need.

Parent PLUS loans are taken out by, you guessed it, your parents! They’re responsible for paying these off, so it’s like them taking one for the team. These loans require a credit check and automatically accrue interest (unsubsidized).

Grad PLUS loans are for grad students. If you’re diving deeper into academia after your undergrad, this is the type of loan you would need. These loans are also unsubsidized and require a credit check. 
Federal student loans can be a big help when funding your education, but always remember to borrow wisely. If you want to learn more about federal loans, check out sallie mae.

What are private student loans?

Federal and private loans have some key differences. Federal loans often come with lower interest rates, and they usually offer more flexible repayment terms, especially if you hit a financial rough patch. However private loans are a bit less predictable. Their terms and interest rates can vary big time depending on the lender and your credit score.

So, why would anyone choose private loans? Well, there are some potential upsides. Maybe you’ve maxed out your federal loan limits, and you need more money to cover tuition. Or perhaps you (or your co-signer) have a fantastic credit score and can secure a better rate from a private lender than a federal loan would offer.

However, the downside is that private loans often have variable interest rates (which can skyrocket), and they don’t typically offer the same safety nets as federal loans, like income-driven repayment plans.

III. Loan Terms and Interest Rates

How do interest rates work for student loans?

when you borrow money, you don’t just pay back what you took out, but a little extra, too. That extra is called “interest,” and it’s essentially the cost of borrowing. For federal loans, not only is the interest rate typically lower, but it is usually fixed. With a fixed rate, your interest won’t change over the life of the loan, which can make accounting for your loans in your budget really easy. If youd’ like to learn more about budgeting as a college student see our ultimate budgeting guide!

Opposite of fixed rate loans, some types of loans have a variable rate. These loans can change based on certain factors (usually related to the broader economy). So, while you might start with a low rate, there’s no guarantee it’ll stay that way. If you’re looking into private loans, which will be explained momentarily, you might encounter this. 

Just to reiterate, if your loans are unsubsidized, while you’re in school, chilling, studying, or maybe stressing over exams, that interest on your loan is also busy doing its thing, even if you don’t see a bill. Once you graduate and that grace period ends, you’ll begin repaying both the original amount and all the interest that’s piled up.

How do interest rates work for private student loans?

Unlike the steady, predictable rates of federal loans, as previously mentioned private loans rates are variable rate loans. These rates are mainly dependent on your credit score (or that of your co-signer). 

Now, why does this matter? Imagine you borrow $10,000 at a 5% interest rate. Over a 10-year period, you’d pay roughly $2,728 in interest. But if that rate was 10%? You’d be shelling out about $5,858 in interest over the same period. That’s more than double! 

A few percentage points can make a massive difference in how much you end up paying back. If you want to learn more about credit scores and how to improve yours, we’ve also got you covered [link to article]

IV. Making Informed Borrowing Decisions

How much would I need to borrow in loans to attend college?

College costs can vary depending on where you go and the relative prestige of the school. In-state tuition for public schools is often the most affordable. Out-of-state tuition at public universities and at private institutions tend to be a lot more expensive. As of 2023, according to the Education Data Initiative, the average cost of attendance could set you back anywhere from $26,000 per year at an in-state public school to well over $50,000 per year at a posh, private one, not accounting for the earned interest on the loan. Add in books, transportation, and your average living expenses and it becomes an even heavier sum.

However, you must also make sure that you don’t make the crucial mistake of overborrowing on your loans. It may seem fun to have instant money at your disposal at first, but soon you’re going to be feeling the weight of that decision. Taking out more loans than necessary can saddle you with unnecessary debt later on. Remember, every dollar borrowed has interest attached. So, while it may seem tempting for some, taking out extra loans for weekend getaways or concert tickets might screw you over in the long run.

What alternative funding sources are available to me?

As daunting and scary it may seem to take out student loans to fund your education, luckily, there are other less debt-inducing routes to pay for school.

Scholarships and grants are basically free money to go to college. Scholarships are often based on merit, like your grades or talents, while grants are generally need-based. Either way, you don’t have to pay them back. From my experience, grants are automatically applied for when you submit your FAFSA, and scholarships need to be applied for individually. Inquire further with your school’s financial aid center to get notified of the application deadlines for these opportunities. 

Work-study is another viable route to reducing the amount of loans you would need to take. Think of it as a part-time job, but more flexible. The government pays a portion of your wages, incentivising employers to want to hire students, and you get to work on campus, which makes rolling out of bed for work way easier. However, there is a maximum amount you can make per quarter or semester. If you don’t like the idea of your pay being capped, a regular part-time job may be more suitable for you. 

If working while you pursue your degree seems feasible for you but you don’t know where to start, check out some tips on how to find the perfect on-campus employment opportunity for you; [article link]

V. Loan Repayment and Strategies

When and how do I start paying off my student loans?

For most issued federal loans and a few private loans, you don’t have to start repaying your student loans the moment you toss your grad cap in the air. As mentioned before, you typically get a grace period—think of it as a mini-vacation from your loan. For federal student loans, this is usually 6 months. It’s a buffer to help you find a job and get settled.

Once your grace period ends, you’re on the hook for paying back all your loans, but there are some loan repayment plans that can help you achieve this in a reasonable time frame:

1. Standard Repayment Plan: It’s the vanilla ice cream of plans. Everyone’s eligible. You pay a fixed amount every month for up to 10 years.

2. Graduated Repayment Plan: Picture your payments starting out small and getting bigger every two years. Everyone with federal student loans can opt for this, and it spans 10 years.

3. Extended Repayment Plan: This one’s for you if you owe more than $30,000 in federal loans. Payments can be fixed or graduated, and the plan lasts up to 25 years.

4. Saving on a Valuable Education (SAVE) Plan: A newer addition, this lets you pay less at first, gradually increasing over 10 years. Everyone’s welcome.

5. Pay As You Earn (PAYE): Monthly payments are capped at 10% of your discretionary income and adjusted annually. It’s for Direct Loan borrowers who meet certain income requirements. After 20 years of payment, the rest is forgiven.

6. Income-Based Repayment (IBR): Payments are 10-15% of your discretionary income and are readjusted each year. After 20-25 years, depending on when you borrowed, any leftover is forgiven. Most federal loan borrowers are in.

7. Income-Contingent Repayment (ICR): Here, payments are the lesser of 20% of discretionary income or what you’d pay on a 12-year fixed plan. Direct Loan holders are eligible, and after 25 years, any remaining balance is forgiven.

8. Income-Sensitive Repayment Plan: Your monthly payment is based on your annual income. It’s for Federal Family Education Loan (FFEL) holders and lasts up to 10 years.

I know it’s a lot, but don’t stress.You’ve got choices. The key is finding what fits your life and budget best. If you would like to learn more about these types of loans and how to apply for them, check out studentaid.gov for more information.

Are there any loan forgiveness programs?

While the current administration’s plans of student loan forgiveness have been shot down in the government, not all paths to loan forgiveness have been lost. One of the best ways to have your loans forgiven is through the Public Service Loan Forgiveness (PSLF) program.

If you see yourself working in a job that serves the public after graduation— think nonprofits, government, public education, or certain healthcare roles, then the PSLF might be your ticket to loan freedom. The deal is that after you’ve made 120 qualifying payments (that’s 10 years, if you’re counting) while working full-time for a qualifying employer, the rest of your federal student loan balance gets wiped out. Pretty cool, right? But there’s a catch; not all loans or payment plans qualify, so you’ll want to make sure you are eligible.

Your loans can also be discharged under the unfortunate circumstance of you becoming permanently disabled or in the event of your death. At the very least you would have the peace of mind knowing the debt won’t be passed on to your family members. However I would personally say that your loans would be the least of your worries were this to happen. 

VI. Avoiding Student Loan Pitfalls

What happens if I default on my loans?

When you default on your loans, you didn’t meet the terms of the loan. This typically happens when you don’t make a payment for 270 days. But, why does it matter? Well, defaulting can ding your credit score, which can make it tough to get apartments, car loans, or even some jobs. Plus, the whole loan amount can become due immediately, and you could face extra fees. Definitely not something you want to happen.

If you’re struggling with repayments, contact your loan servicer ASAP. They’re not the enemy and often have options to help you out. You could ask to adjust your repayment plan, ask for deferment of payments, or even a forbearance. Both deferments and forbearances are temporary pauses in payments, but interest will continue to accrue for a forbearance.

Life happens, and sometimes it throws curveballs. If you find yourself struggling to make loan payments, ghosting your loan servicer will be one of the worst things you could possibly do. Always reach out, talk about your options, and try to make all your payments on time. 

Should I consolidate or refinance my student loans?

Consolidation plans are like tossing all your federal loans into a blender and hitting ‘mix’. You end up with one loan, one monthly payment, and one fixed interest rate. Sounds simple, right? The good part is, it really does make life easier with one bill to manage. Plus, it can open up some doors to more favorable repayment plans or even loan forgiveness programs. Taking this route might increase the length of your loan, and you could end up paying more in interest over time. 

Refinancing is basically going to a lender and saying, “Hey, can we make a deal? I’ll take a new loan with better terms, and in exchange, I’ll use it to pay off my old ones.” It’s a bit like trading in an old car for a newer model. This can include federal and/or private loans. If you’ve got a solid job and your credit score is great, you could secure a lower interest rate, which means saving money in the long haul. But by refinancing federal loans with a private lender, you might lose some special federal loan benefits, like access to forgiveness programs or having flexible repayment options.

Both have their perks, but it really boils down to your personal situation. So, do your homework, crunch the numbers, and chat with a finance professional. 

Avoiding repayment scams

Dealing with student loan debt is already stressful, and unfortunately scams targeting loan borrowers are on the rise. Scammers will often try to pretend to be your loan officer or from a debt collection agency in attempts to get you to send them money. The best way of avoiding scammers is educating yourself on their tactics. No one wants to face the embarrassment and financial burden of falling victim to these types of scams.

Final Word

We dove into the nitty-gritty of federal and private loans, dissected the jargon around interest rates, outlined the different repayment plans available to you, and discussed loan consolidation and refinancing options under the case of a default. Before you take out tens of thousands of dollars in loans for college, the best thing you could do is arm yourself with knowledge on how these loans work. Make choices that vibe with your goals and where you see yourself in the future, and don’t be afraid to ask for help or advice along the way! 
If you found value from this post, subscribe to the Frugal Student Newsletter for more valuable insight on financially responsible living in college. Our mission is to give every college student the knowledge to be able to finish college with the least amount of debt possible!

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