How Student Loans Work

How Student Loans Work – The process of taking out and repaying student loans can be confusing. Get the facts on how student loans work so you can make smart decisions about borrowing and repayment.

Checkout this video:

Overview of Student Loans

Federal student loans are an investment in your future. After you graduate, find a job, and start repaying your loans, you’ll have the opportunity to improve your life and career. To make the process as seamless as possible, it’s important to understand how student loans work. In this guide, we’ll provide an overview of the types of student loans available, how they work, and what you need to do to get started.

Types of Student Loans

There are four main types of student loans: federal loans, private loans, Parent PLUS loans, and graduate PLUS loans.

Federal Loans:
-Direct Subsidized Loans: These need-based loans are reserved for undergraduates with demonstrated financial need. The government pays the interest on these loans while the student is in school and during their grace period.
-Direct Unsubsidized Loans: These non-need-based loans are available to both undergraduates and graduate students. The student is responsible for paying the interest on these loans while in school and during their grace period.
-Direct PLUS Loans: These credit-based loans are available to graduate students and parents of dependent undergraduate students. The borrower is responsible for paying the interest on these loans at all times. Interest rates are slightly higher for PLUS loans than for unsubsidized Direct Loans.
-Direct Consolidation Loans: These fixed-rate loans allow borrowers to combine all of their eligible federal student loans into a single loan with one monthly payment. This can help make repayment more manageable, but it will also result in a longer repayment term and higher total interest charges over the life of the loan.

Private Loans:
Private student loans are offered by banks, credit unions, and other private lenders. They are not regulated by the federal government and typically have higher interest rates than federal student loans. Private lenders also generally have fewer repayment options than the Department of Education, so it’s important to compare your options carefully before taking out a private loan.

Parent PLUS Loans:
Parent PLUS Loans are federal student loans that parents can use to help pay for their child’s education. These credit-based loans have fixed interest rates and can be used to cover any remaining cost of attendance not covered by other financial aid (such as scholarships or grants). Parents are responsible for repaying Parent PLUS Loans even if their child does not complete their degree program or is unable to find a job after graduation.

Graduate PLUS Loans: Graduate students can also take out PLUS Loans to help cover their educational expenses. These credit-based loans have fixed interest rates and can be used to cover any remaining cost of attendance not covered by other financial aid (such as scholarships or grants). Graduate students are responsible for repaying Graduate PLUS Loans even if they do not complete their degree program or are unable to find a job after graduation

How Student Loans Work

Student loans are a form of financial aid that must be repaid, with interest. Loans are available from the federal government, private lenders, and state or local governments. The type of loan, the lender, the interest rate, and repayment terms differ depending on the loan program.

Direct Subsidized Loans are available to undergraduate students with financial need. The U.S. Department of Education pays the interest on a Direct Subsidized Loan while you’re in school at least half-time, for up to six months after you leave school (referred to as a grace period*), and during a period of deferment (a postponement of loan payments).
Repaying Your Loan
If you receive a Direct Subsidized Loan that is first disbursed between July 1, 2020, and June 30, 2021, there is a limit on the amount of time (measured in academic years) that you can receive Direct Subsidized Loans. This time limit does not apply to Direct Unsubsidized Loans or Direct PLUS Loans. If this limit applies to you, you may not receive Direct Subsidized Loans for more than 150% of the published length of your program. This is called your “maximum eligibility period.” Your maximum eligibility period is based on the published length of your current program. You can usually find this information in your school’s catalog.
If you have received Direct Subsidized Loans for your maximum eligibility period and you are still enrolled in an undergraduate program when the grace period expires, you will only be able to receive Direct Unsubsidized Loans after that point.

The Application Process

Applying for student loans can seem daunting, but it doesn’t have to be. The first step is to fill out the FAFSA which is the Free Application for Federal Student Aid. This will help you to see what loans you qualify for. The next step is to fill out a Master Promissory Note which is a legally binding document that you will sign when you agree to the terms of the loan. Finally, you will need to complete entrance counseling which is designed to help you understand the responsibilities of taking out a loan.

Applying for Student Loans

To apply for student loans, you will first need to fill out and submit the Free Application for Federal Student Aid (FAFSA). The FAFSA is used to determine your eligibility for federal student aid, which can include grants, loans, and work-study.

Once you have submitted your FAFSA, you will receive a Student Aid Report (SAR) that will detail your expected family contribution (EFC). Your EFC is the amount of money that your family is expected to contribute towards your education.

Based on your EFC, you may be eligible for federal student loans. If you are eligible, you will be contacted by your school’s financial aid office with instructions on how to complete the loan process.

If you are not eligible for federal student loans, you may still be eligible for private student loans. Private student loans are offered by banks and other private lenders, and they typically have higher interest rates than federal student loans.

To apply for private student loans, you will need to contact the lender directly and complete a loan application. You may also need to provide a cosigner for the loan.

The FAFSA

The FAFSA is the Free Application for Federal Student Aid, and it’s the first step in getting federal student loans. The FAFSA becomes available every October 1 for the following school year.

To fill out the FAFSA, you’ll need to have your most recent tax return handy. You and your parents (if you’re a dependent student) will need to provide information about your income and assets. Based on this information, the government will calculate your Expected Family Contribution (EFC).

Your EFC is used to determine how much financial aid you’re eligible for. It’s important to remember that your EFC is not the amount of money your family will have to pay for college – it’s the amount you’ll be expected to contribute. The government, your state, and your school will make up the difference between your EFC and the cost of attendance.

Once you’ve submitted your FAFSA, you’ll receive a Student Aid Report (SAR). The SAR contains information from your FAFSA, as well as your EFC. Review the SAR carefully – if any of the information is incorrect, make corrections and resubmit it.

After you’ve submitted a corrected SAR, you’ll receive another one in the mail. This new SAR will list your revised EFC. Once you have your final EFC number, you can start looking for scholarships and other types of financial aid to help pay for college.

Student Loan Repayment

The first thing you need to know about student loans is that you will have to repay them. There is no such thing as a free ride when it comes to borrowing money for your education. The good news is that you don’t have to start making payments on your student loans right away. In most cases, you will have a six-month grace period after you graduate before you have to start making payments.

Loan Repayment Plans

The first thing you need to do is find out who services your loan. You can do this by logging into the National Student Loan Data System. Once you know who services your loan, contact your loan servicer and ask about repayment plans.

There are several types of repayment plans available, and you may be eligible for more than one. The type of repayment plan that’s best for you depends on your individual circumstances, such as your income and family size.

Standard Repayment Plan
Under this plan, you’ll pay a fixed amount each month for up to 10 years. This is the default repayment plan for federal student loans.

Graduated Repayment Plan
Under this plan, your payments start out low and increase every two years. The length of your repayment period will be up to 10 years.

Extended Repayment Plan
Under this plan, you may be able to extend your repayment period to 25 years if you have certain types of loans from the Direct Loan or FFEL Program. To qualify, you must have $30,000 or more in outstanding Direct Loans or FFEL Program Loans as of October 7, 1998.
Pay As You Earn Repayment Plan (New!) If you have a need for a lower monthly payment amount, this option may be right for you! Under this new plan: Your monthly payments will never be more than 10% of your “discretionary income” Any balance remaining on your loan after 20 or 25 years will be forgiven You must have received a disbursement of a Direct Loan on or after October 1, 2011 You must not have had an outstanding balance on a Direct Loan as of October 1, 2007 Only Direct Loans are eligible – Federal Family Education Loans (FFEL) are not eligible You can apply for this repayment option by visiting www.studentaid.gov/pay-as-you-earn

Loan Forgiveness

Loan forgiveness is when you are no longer required to repay some or all of your student loans. It’s usually given to borrowers who work in specific occupations or for specific employers.

There are several ways to get loan forgiveness:
-Public Service Loan Forgiveness: If you work for a government or not-for-profit organization, you may be eligible for this program. You need to make 120 qualifying monthly payments while working full-time for an eligible employer.
-Teacher Loan Forgiveness: If you teach full-time for five complete and consecutive academic years in a low-income elementary or secondary school, or educational service agency, you may be eligible for this program.
-Perkins Loan Cancellation and Discharge: If you teach or work in certain high-need fields, serve as a volunteer, or meet other requirements, you may be eligible to have your Perkins Loan cancelled.
-Nurse Faculty Loan Program: Nurses who agree to teach full time may have up to 85% of their nursing school debt forgiven.

Student Loan Consolidation

There are two main types of student loans: federal student loans and private student loans. Federal student loans are loans that are provided by the government and they have fixed interest rates. Private student loans are loans that are provided by private lenders and they have variable interest rates.

Pros and Cons of Student Loan Consolidation

When it comes to student loan consolidation, there are a lot of pros and cons to consider. On the one hand, consolidating your loans can help you save money on interest and make your monthly payments more manageable. On the other hand, it can also extend the length of your loan term, which means you’ll end up paying more in interest over time.

Here are some things to keep in mind when you’re weighing the pros and cons of student loan consolidation:

Pros:
-Lower monthly payments: When you consolidate your loans, you may be able to qualify for a lower interest rate, which means your monthly payments will be lower.
-Simplified repayment: If you have multiple student loans from different lenders, consolidating them into one loan can make repayment simpler and easier to keep track of.
-Potential to save money on interest: If you consolidate your loans into a single loan with a lower interest rate, you could save money on interest over the life of your loan.
-Deferment and forbearance options: If you consolidate your federal student loans, you’ll retain access to deferment and forbearance options, which can help you manage your debt if you hit a financial hardships.
Cons:

-Longer repayment period: When you consolidate your loans, you may end up extending the repayment period for your loan, which means you’ll be paying more in interest over time.
-Loss of benefits: If you consolidate federal student loans, you may lose out on certain benefits that are available with federal loans, such as income-driven repayment plans and public service loan forgiveness.
-Higher total interest costs: In some cases, consolidating your loans could lead to higher total interest costs over the life of the loan.

Student Loan Refinancing

If you’re looking to lower your monthly student loan payment or pay off your loan faster, you may want to consider student loan refinancing. Student loan refinancing is when you take out a new loan with a lower interest rate to pay off your current student loans. This can save you money on interest and help you get out of debt faster.

Pros and Cons of Student Loan Refinancing

The pros of student loan refinancing are that you may be able to get a lower interest rate, which could save you money over the life of your loan. You may also be able to extend the length of your loan, which could lower your monthly payments. The cons of student loan refinancing are that it may not be possible to get a lower interest rate, and you may have to pay fees to refinance your loan. You also may not be able to include all of your loans in the refinancing process.