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Everything You Need to Know About Student Loans

The cost of education continues to skyrocket, and there are no signs of prices leveling off anytime soon. A traditional four-year degree program leaves many students swimming in debt, and the price tag of pursuing an advanced degree makes the cost even harder to handle. 

Your choices about student loans begin even before you enter school, so understanding the process and making smart decisions now will impact how you deal with financial obligations after you graduate. Picking the right school and program, choosing the right loan, optimizing your repayment and consolidation, and taking advantage of assistance programs can all help to reduce your overall exposure.

Deciding on How Much Education

Tuition and fees vary greatly – for undergraduates, they often total $10,000-40,000 per year, while a master’s degree can cost $30,000-100,000+. For medical students the costs – and the likelihood of going into debt to finish school – is even higher. According to the Association of American Medical Colleges, in 2019, the median debt acquired to complete medical school was a whopping $200,000.

Making a choice to earn higher education credentials, and deciding on the appropriate level of higher education, requires careful consideration of the benefits and costs. The benefits are usually straightforward – higher education can help you improve job prospects, earn more money, increase industry know-how, start a career or switch careers, and explore personal development and satisfaction.

The drawbacks can be a bit trickier, though. You’ll need to decide if the cost of your education is going to pay off the long run and if you can handle the additional financial pressure in the short run. Consider the following:

• Financial feasibility: a rule of thumb is that total college costs should be no more than 2x your anticipated annual income after graduation. 
• Funding sources: whether you use personal savings or financial aid in the form of student loans, grants, or scholarships, how you pay for your education will determine your overall costs, as well as your repayment timeline. 
• Program type and location: online classes and in-state tuition tend to be less expensive than in-person classes and out-of-state tuition.
• Financial goals: funding an advanced degree can push back other goals, like retirement savings or a down payment on a house.

Choosing the Right Student Loan

Once you’ve set your mind on continuing your education, whether through undergraduate, graduate, or advanced degrees, you’ll need to consider your funding. Your first choice should be financial aid sources that you don’t have to pay back, like grants and scholarships, or money that you don’t have to pay interest on, like personal savings.

If you’ve exhausted these kinds of options and still don’t have enough to cover your expenses, your next move is to look at student loans. There are two types of student loans available: federal and private. Most students will opt for the federal loans if they can, due to their significant benefits. But for those who don’t qualify or need additional funds, private loans are a second option.

Federal Loans

Federal loans tend to be the preferred loan option because they are backed by the government, which has additional benefits over private loans. To apply for federal loans, you’ll need to complete the Free Application for Federal Student Aid (FAFSA). Your university will then notify you of the federal student loans for which you are eligible. Eligibility for these loans is based on things like financial need, citizenship status, and enrollment in an approved program. State governments offer similar types of financial assistance, so you should also look into their programs to supplement your qualified needs.

If you do qualify for government loans, you can benefit from some of the following protections:

• Forgiveness programs: whereas private loans are never forgiven, some federal loans can be forgiven over time if you follow a certain protocol (more on this later). 
• Fixed rates: unlikely with a private loan, fixed interest rates on federal loans are locked in and will not change for any reason, meaning you pay the same amount every month and your total payback amount will not change in the long run.
• Income-driven repayment plans: an income-driven repayment plan, an option for some federal loans, offers you the option to adjust your monthly payments according to your income; this can be a big help for recent graduates.
• Subsidies: private loans are rarely subsidized, but with subsidized federal loans, the government pays the interest on the loan while you are in school. 
• No credit checks or cosigners: credit score is important for securing a private loan, but anyone who qualifies can get a federal loan, even if you don’t have an established credit history.
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Private Loans

If you are considering a private student loan, you’ll want to shop around. It’s up to you to find the best deal on essential features like rates, fees, and payback terms, which determine how much you end up paying in the end. Private loans often have drastically different terms and conditions than the federal options. Before you commit to a private loan offer, consider these important factors:

• Lender: possibilities include banks and credit unions. Make sure to vet your lender before signing for a loan – your university may have a list of preferred lenders that you can use as a starting point. 
• Interest rate: determined by your credit history and other types of risk factors. Interest rates vary, with the lowest rates generally available only for those with exceptional credit scores. 
• Type of rate: either variable or fixed rate, with most private lenders offering variable rates. This means the interest rate can, and likely will, fluctuate over the life of the loan, changing your monthly payment over time and the total amount you pay in the long run. 
• Fees: commonly in the form of origination fees, application fees, and prepayment fees, etc. Be sure to include these add-ons in your evaluation of the loan. 
• Perks: could be debt management programs and educational resources or flexible repayment structures and deferral opportunities. Ask your potential lender what makes them a better option than the other guys – you will want to know what resources you’ll have available during payback before you commit.

Repaying Student Loans 

Many people look at their student loans and feel their stomach drop. Thinking about how to repay that much debt can make your head spin. Fortunately, federal loans (and some private loans) allow for flexible repayment. 

The default plan for federal loan repayment is a standard repayment plan, which structures your monthly payments with a fixed amount and a defined end date. While this option has higher monthly payments than other options, you will pay the loan off sooner and with less accumulated interest, saving you money in the long run. 

For new graduates with a high debt-to-income ratio when they first enter the workforce, this type of plan may not be feasible. That’s why some students will opt for either an extended repayment plan (which can be anywhere from 10-30 years) or an income-based repayment plan (which can be anywhere from 10-15% of your income). Both plans lower your monthly payments by drawing out the length of the payback period. This could mean you end up paying more interest, and therefore, more money in the long run; however, these plans are aimed to prevent unnecessary loan defaults by offering a financially feasible path to repayment. 

If you have private student loans, check with your lender for options that they offer to new graduates (like interest-only payments) or those suffering from financial hardship (like forbearance).

Loan Forgiveness and Assistance

Loan forgiveness and assistance can come in various forms, from both the state and federal governments. If you hold federal student loans, consider looking into the following programs:

• Public Service Loan Forgiveness: for people who work full-time for eligible employers – generally government organizations or not-for-profits – and make 120 qualifying payments (over 10 years). The loan must be a federal Direct Loan or a Direct Consolidation Loan (only payments made on the newly consolidated loan will be counted toward the required 120 payments). Repayment must be by a qualifying plan like income-based repayment or income-contingent repayment plans.
• Teacher Loan Forgiveness: for people who work full-time for a low-income school and complete five consecutive academic years.  The loan must be a federal Direct Loan or FFEL Program loan.
• Perkins Loan Cancellation and Discharge: for people who teach (or work in other service capacities like firefighters, law enforcement officers, members of the military, etc.) full or partial loan cancellation may be available based on your situation. Loan discharge may also be possible for situations such as bankruptcy, death, or school closure. 

In addition, there are various state-run student loan assistance programs, which range from scholarships and grants to repayment assistance and work-based loan forgiveness. New York, for example, has the Doctors Across New York assistance program that helps train and place physicians in underserved communities. After a 3-year service commitment, you become eligible to apply for the grant equaling up to a maximum of $120,000. Every state has a different set of assistance programs, and it’s worth looking into which ones you qualify for and what you’d need to do to work toward them.

Consolidating Student Loans

Some Americans who carry student loan debt turn to consolidation and refinancing to help them cut down interest and speed up the repayment process. People look to these options for single-payment solutions, lower interest rates, and shorter repayment timelines. Some things to consider when evaluating refinancing/consolidation options include total student loan debt, current interest rate(s), loan makeup (private/ federal), and forgiveness/assistance eligibility.

It’s also important to understand that consolidation and refinancing are not synonymous. You can, in some cases, refinance your private loans to gain a lower interest rate without consolidating multiple loans into one, new loan. Depending on your distribution of federal and private loans, you’ll want to consider a few options:

• Consolidating only federal loans: This won’t change your monthly payment on its own – your interest rate will be equal to а weighted average of the rate you were paying on your original loans – but it will simplify your life by putting everything you owe into а single loan. It could also qualify you for а longer repayment period on these loans, meaning that you could lower your monthly payment. 
• Consolidating federal loans and refinancing private loans: If you have private loans in addition to your federal loans, refinancing your private loans can simplify your payments and allow you to add or remove а cosigner, secure а better rate, and extend or reduce your repayment terms.
• Consolidating all loans (federal and private) together: This option may simplify your bills even further or even save you money on interest if your federal rates are higher than market rates. If you do this, however, you will lose eligibility for some federal loan protections, such as forbearance or deferment. 

Consolidation and refinancing aren’t one-size-fits-all solutions. Your personal situation will dictate the best solution. If you qualify for federal forgiveness or assistance programs, you’ll want to be sure which consolidation options will preserve your eligibility for these programs.

Avoiding Default on Your Loans

Student loans are some of the most demanding forms of debt you can own because, unlike other types of debt, student loans are not eliminated by bankruptcy. No matter what your financial situation looks like, you are stuck with that debt until you finally pay it off in full. According to an article by Forbes, in the United States, approximately 45 million Americans are in debt by more than $1.6 trillion dollars with student loans. Of that number, about 5.5 million borrowers were in default on their federal Direct Loans as of 2019.

To avoid this fate, it’s important to understand what causes a loan to go into default. Missing a payment on your student loans can put you into one of three situations:

1. Grace Period: Many loans offer a grace period of 5, 10, or even 15 days during which time if you haven’t made your payment, your money is considered “past due”. 
2. Delinquency: If your payment still hasn’t been submitted after a period of 90 days, your account is considered delinquent. The loan company will report this to the credit bureaus, TransUnion, Experian, and Equifax, which will almost immediately lower your credit score.
3. Default: After 270 days, the account is in default and will likely be turned over to a collection agency. Debt collectors will begin to call you to find out when you are going to repay your loan in full. The longer the lapse in payments, the worse it can be for your credit score.

Going into default can bring some pretty serious consequences, which can dramatically impact your credit history and your ability to get approved for things like a car loan or a mortgage. To avoid defaulting on your loan you will want to take the following steps:

• Make a payment ASAP: 270 is a critical number. You do not need to be current with your loan to avoid going into default. If you make a payment before that 270-day threshold, you can stay out of the most serious trouble. But sooner is better, since even being 90 or 180 days late will still affect your credit score negatively. 
• Contact your lender: Simply picking up the phone and telling them that you’re having trouble coming up with the payments could prevent you from going into default. While it may be uncomfortable, discussing the issue directly could prove to be a better alternative than staying silent. 
• Consider flexible payment options: Federal student loans come with flexible payment options that are often far more forgiving and permissive than loans you can get from private lenders.  While it may take longer to pay off your debt in full and could result in additional interest costs, it can give you more wiggle room on meeting your payments. 
• Request deferral or forbearance: If you simply cannot make any payments on your loan, you can avoid default through deferment or forbearance, which puts a stop to your payments until you are able to start making them again. This should only be considered a final option after you’ve exhausted all other alternatives. 

Summary

Student loans can be a huge financial burden, causing millions of Americans to go into debt, but are often the only way to fund the higher education that people need for their careers. Making smart decisions along the way, from which school you go to and what program of study you enter, to choosing the right lender, to taking advantage of all the assistance and flexibility that you can, will help to make managing your student loans and your financial situation easier. Understanding the terms of your loans and their implications for your future finances will go a long way to minimizing your overall costs and keeping you from delinquency or default.