Student Loans
Enrolling in higher education is a huge financial decision, and many students often need to take out loans to pay for their expenses while in school. Since you are making a large investment in your future, it's important to understand the different types of student loans and what your student loan payment will look like after graduation.
As an example, let's say you take out $30,000 in federal student loans with a student loan interest rate averaging 5%. If you plan to pay off your loans in 10 years by following the standard repayment plan (which will cost you the least amount of interest!), your monthly payment after graduation is just under $320. Once you finish making your student loan payments, you will have paid more than $8,000 in interest to the federal government! Use the student loan calculator below to estimate what your student loan payment could be and see what is looks like to pay off your student loans over time.
What are student loans?
Student loans are loans meant to help students pay for their higher education expenses. Student loans are either provided by the U.S. government, or by private lenders like banks, credit unions, and other financial institutions. Here is a basic overview of federal and private student loans:
Federal Student Loans
- Lender: Provided by the U.S. government
-
Interest: Federal student loans typically have fixed
interest rates set by the U.S. Congress. These rates are
usually lower than those for private student loans.
Additionally, the government offers different interest rates
and terms for different types of loans:
- Direct Subsidized Loans: These loans are offered to undergraduate students with financial need. The government pays any interest that accrues on direct subsidized loans while you are still in school at least half-time, during the grace period, and during forbearance.
- Direct Unsubsidized Loans: These loans are offered to undergraduate and graduate students regardless of financial need. Interest on direct unsubsidized loans accrues while you are in school, and you are responsible for paying it.
- Direct Plus Loans: These loans are offered to graduate students and parents of undergraduates. Financial need is not required, but there is a credit check, and interest rates on direct plus loans are higher than subsidized and unsubsidized loans.
- Eligibility: Eligibility for federal student loans is based on financial need (for subsidized loans) and additional factors, but they are generally available to a broad range of students
-
Repayment Options: There are multiple plans offered for
student loan repayment including:
- Standard Repayment: Fixed payments over 10 years. With this plan you end up paying the LEAST amount of interest!
- Graduated Repayment: Payments start lower and increase over time.
- Income-Driven Repayment: Payments are based on your income and may be adjusted every year.
- Forgiveness and Discharge: Students who take out federal student loans are eligible for student loan forgiveness programs such as Public Service Loan Forgiveness (PSLF).
- Grace Period: Typically, there is a 6 month grace period after grauduation (or after you drop below half-time enrollment) until payments begin.
- Loan Limits: There are annual and aggregate borrowing limits based on your year in school and your dependency status.
Private Student Loans
- Lender: Private student loans are provided by private lenders like banks, credit unions, and other financial institutions.
- Interest: Private student loan interest rates can be fixed or variable. They also vary based on the lender, your creditworthiness, and market conditions, which often results in higher rates than federal student loans.
- Eligibility: Private loans usually require you to have a good credit score and you may need a co-signer if you have a limited credit history.
- Repayment Options: Repayment terms vary by lender and there may not be any flexible repayment options. Most private student loans have a standard repayment schedule.
- Forgiveness and Discharge: Private lenders generally do not offer forgiveness options and are often less flexible in terms of discharge in cases of bankruptcy.
- Grace Period: Grace periods before payments begin can vary widely, and they may not be offered at all.
- Loan Limits: Limits are determined by the lender and your creditworthiness, and they can be higher than federal loan limits.
*** Due to these differences, it's often recommended to exhaust all federal student loan options before considering private student loans in order to minimize borrowing costs (interest!) and maximize flexibility. ***
Whether you have federal student loans or private student loans, you need to start repaying your loans after you graduate. If you are on the standard repayment plan (in which you pay the least amount of interest!), your monthly student loan payment is determined by an amortization schedule. Amortization schedules can be complicated, mathy, and confusing at first, but let's simplify it so that you understand what goes into your monthly student loan payment.
What is student loan amortization?
Amortization is the process of paying off your student loans (or any loan) over time through a series of fixed monthly payments. Your student loan payment is calculated based on the loan amount, the student loan interest rate, and the loan term. The fixed monthly payment is divided into two parts:
- Principal: This part of your student loan payment goes toward paying down the original loan amount. As more principal is paid, you owe less money to the loan lender.
- Interest: This part of your payment is the cost of borrowing money, or in other words, that extra amount that you are paying your lender since they loaned you the money to pay for college.
The amount of principal and interest you pay changes every month, but your monthly student loan payment stays the same. When you first start paying the loan back, the monthly payment is mostly made up of interest. This is because your loan balance is at its highest point, and since interest is calculated based on this balance, the interest payment is large while the balance is large. Additionally, the structure of an amortization schedule helps lenders cover the risk of giving you money, as they are making more money up front instead of waiting the standard 10 years for you to pay them back.