How Student Loans Work
Student loans help to bridge the financial gap between what a student can pay and the cost of attendance at their school of choice. Students typically require loans because their financial aid package falls short of the full cost.
Generally speaking, student loans are money that is borrowed from the federal government or a private lender in order to make tuition payments while a student is enrolled in school. After graduation, the borrower must pay back the money borrowed – with interest, in some cases.
When it comes to
student loans, students have a variety of options:
Types of Loans
There are two types of student loans:
federal student loans
private student loans.
Federal student loans come in two forms: subsidized and unsubsidized. Subsidized loans are given to students who demonstrate financial aid need, and the federal government pays the interest while a student is in school.
Unsubsidized loans are available to all students, regardless of financial need. However, students with unsubsidized loans are responsible for paying all interest on their loans. In order to be eligible for both federal student loan options, students must submit a Free Application for Federal Student Aid (more commonly known as the
federal student loans
aren’t enough, students can investigate
private student loans
to help pay for college. Students can find private student loans two ways: right here on Fastweb or through a college’s preferred lender list.
How to Apply
Applying for student loans is a two-fold process. First, students must fill out the
in order to qualify for subsidized or unsubsidized federal loans. The FAFSA becomes available each year on October 1, and students are encouraged to submit the application as soon as possible.
When completing the FAFSA, students will be asked questions about how much money parents make, whether or not the student is supported by one parent or both, and how many other siblings will be enrolled in college at the same time. Based on the answers to those questions, an Expected Family Contribution (EFC) is determined. This figure represents how much the federal government believes a family – or student – can pay toward their college education.
If a student is deemed as financially needy, they may receive grants and work-study. They may also qualify for the subsidized student loan. Students will be notified if they qualify for the subsidized loan through their financial aid packages from colleges.
Students that do not demonstrate financial need can still receive the unsubsidized loan from the federal government. Though they will have to pay the interest back on this particular federal loan, it is still a pretty great deal. Federal loans have the lowest interest rate of any student loan program – so always borrow federal first.
When it comes to private loans, students must apply directly with the lender. Again, students can find private loan options here on Fastweb or through recommendations from their college’s financial aid office. Oftentimes, borrowers will need a co-signer on private student loans.
What happens if financial circumstances change for students? The beauty of the financial aid process is that nothing is ever set in stone. Financial aid officers can make accommodations for students who have extenuating or changing circumstances, such as a parent’s sudden job loss or scenarios that cannot be articulated on the FAFSA.
If students feel like they need more from their financial aid package, like a switch from an unsubsidized loan to subsidized or more grant aid, they should reach out to the financial aid office at the college they hope to attend and ask for a
Paying Back Loans
Taking on student loans is a big commitment that should not be taken lightly. Remember, students must repay whatever they borrow – with interest. This is a decision that will impact the future for years to come, so make sure to do thorough research before signing on any dotted line.
A good rule of thumb to follow is to never borrow more than the average annual salary for recent college graduates. Also, calculating estimated student loan payments before committing to taking on student loan debt is an excellent strategy for ensuring against overborrowing.
For federal student loan borrowers, there are multiple
student loan repayment plans
to choose from:
Standard Repayment Plan
– Payments are a fixed amount that ensures borrowers will pay off the balance in 10 years.
Graduated Repayment Plan
– Initially, payments are low but then increase every two years so that borrowers pay the balance over the course of 10 years.
Extended Repayment Plan
– Payments can be fixed or graduated and should be paid within 25 years.
Revised Pay As You Earn Repayment Plan (REPAYE)
– Monthly payments are set at 10% of the borrower’s discretionary income, which are recalculated with an increase in income and changes to family size.
Income-Based Repayment Plan (IBR)
– Monthly payments on this plan are set at 10 – 15% of discretionary income, depending on when borrowers first received their loan.
Income-Contingent Repayment Plan (ICR)
– Borrowers pay either 20% of their income or the same amount as would be paid on a repayment plan with a fixed payment over 12 years.
Income-Sensitive Repayment Plan
– Monthly payments are based on income but will be paid off in 15 years.
Private student loan repayment options vary by plan and provider. However, once students find a lender to borrow from, they can do similar research of how much to borrow as well as what payments may look like after graduation in order to make smart borrowing choices. From there, students can either commit to a lender or shop around a little more to find a better interest rate or lending agreement.
Student loan forgiveness
is available to some borrowers. Under the Public Service Loan Forgiveness (PSLF) Program, borrowers may have their student loans forgiven if they make 120 qualifying payments toward their loan while working for a qualifying employer.
The Teacher Loan Forgiveness Program is available to borrowers who teach for five complete and consecutive years at a low-income elementary school, secondary school, or educational service agency. The maximum amount that can be forgiven is $17,500.
Finally, most student loan programs provide a six-month grace period after graduation. This period does not require borrowers to make payments on their loans. Rather, they have time to get a job and get settled into a financial routine before having to make their first student loan payment.