For many college students, loans are necessary to pay for the expenses of higher education. Understanding those loans can get complex, especially if this is your first experience with borrowing money. Even if you’ve taken out a loan before, such as for a car, student loans operate differently in terms of payback and interest.
Where to Start
When you prepare to apply for schools, you can also start looking into financial aid options to pay for school. You’re certainly not alone if you take out loans for school. The Institute for College Success reported that nearly 70 percent of graduates in 2015 had student loan debt. The average amount of debt for graduates in 2016 was $37,172.
You can obtain a loan from a number of lenders. If you have an established relationship with a bank or credit union, that could be a good place to start. Online lenders also offer competitive rates. You can find loan options through the federal government.
Understanding the Types of Loans
Students can choose from two types of loans: private and federal. Private loans come from financial institutions and banks. When you apply for a private loan, the institution will pull your credit to determine whether you qualify and what your interest rate will be, although you can have your parents cosign if you don’t have much credit yet. The interest rates on private loans are usually higher, and the repayment terms tend to be less generous.
Federal loans come from the federal government, and any student who graduates from high school is eligible to apply. The main subcategories of federal loans are Direct, Direct PLUS, and Perkins. Direct PLUS loans are only available to graduate students and parents.
How to Apply for Federal Loans
With a number of loans available, many college-bound students start by applying for federal options. To qualify, you need to fill out the Free Application for Federal Student Aid (FAFSA®). When you fill out this form, make sure to compile the necessary financial information before you get started. FAFSA® determines how much you can pay toward the costs of college. It will also take your family’s financial situation into account, so you’ll need your parents’ tax forms and other financial documents.
If you want to apply for a private loan, you will go to the bank or other institution to fill out their forms. Filling out the FAFSA® won’t help you qualify for a private loan.
When you do qualify for federal loans, you’ll have a grace period for repayment. You will need to start repaying the loans, including the interest, within about six to nine months from graduation. You will also have to start repayment of the loans if you drop below half-time enrollment. When you receive the loan, the lender will give you a loan repayment schedule that details the terms and when your first payment is due. The schedule will include a grace period, which is usually several months after graduation or dropping to half-time or less.
The default term on a federal student loan is 10 years, although you can change your loan term during exit counseling. Working in certain professions could also come with federal loan forgiveness, such as a job with a nonprofit, in the education field, or with a government agency.
Grace Period Exceptions
There are several situations that can change the grace period on your student loan. If you are called to active military duty service for more than 30 days before your grace period ends, you will be eligible for an additional six months. The six-month period begins when you return from active duty. Another exception is if you drop below half-time in school but re-enroll to full-time status. When you re-enroll, the six-month grace period starts over.
The third circumstance that affects your loan grace period is consolidation. If you consolidate your loan at any point during the grace period, you will forfeit the remainder of the time and start repaying the loan within a few months of disbursement.
How to Repay Student Loans
If you borrow money from a private financial institution, you will make your monthly payments to that institution. Some banks and credit unions will sell the loans to other institutions, so review the terms of your loan before you send in your first payment. Federal loans go through a loan servicer, so you’ll get information about where to make your payment before your grace period ends. Electronic payments are the easiest option, but you can also mail payments to the financial institution.
If you can manage, try to pay a bit more than the minimum payment each month. Doing so can help reduce the amount of interest you’ll pay over the life of the loan, but only if you specify to the lender that the additional funds should go toward the principal, not toward future payments. If paying more than the minimum isn’t possible, make sure you’re making your required payment on time. Skipping a payment or even paying it a few days late can have a negative impact on your credit.
What to Do If You Can’t Pay
Unforeseen circumstances can make it difficult or impossible to make your monthly payment toward a student loan. You might have lost your job or experienced a medical issue that keeps you away from the office. Instead of ignoring the issue, talk to your lender or loan servicer to discuss options. In certain situations, you can receive a deferment or forbearance that allows you to stop paying back your loan or reduce the total on a temporary basis. When you meet the criteria, going through this process will prevent you from defaulting on the loan, which can damage your credit substantially.
The two types of forbearances are general and mandatory. General forbearance, also called discretionary forbearance, relates to circumstances that make it difficult to pay, such as medical problems, loss of employment, or financial difficulties. Mandatory forbearance applies if you are serving in an eligible residency or internship program or you meet other criteria.
Student loans can make it possible to attend school when you don’t have the money to pay for it yourself. Understanding the terms and options available can help you get the right loan for your situation.