Student loans. We’ve been hearing about them everywhere. From newscasts to talk shows to political debates, everyone’s talking about student loans – or more precisely – student loan debt.
There are a number of explanations for the popularity of this topic, the primary reason revolving around the facts:
- The total U.S. student loan debt is $1.26 trillion
- The number of Americans with student loan debt is over 43 million
- The delinquency rate of student loans is 11.6%
- The average monthly student loan payment for borrowers ages 20 – 30 is $351
These numbers tell an interesting story and they’re also why student loans and their impact are top of mind for so many people. Although this post isn’t going to solve the student loan debt crisis, it can help provide an understanding of what these loans are and how they work. Hopefully, this information can assist you in making the best decisions for your current and/or future student loan undertaking.
Types of Student Loans
- Federal student loans are those that are provided by the government. These are typically lower interest rate loans available for students and parents to borrow directly from the federal government. There are 3 categories of Federal student loans:
- Direct subsidized loans that are based on financial need for which no interest is charged while the undergraduate is in school half-to-full time and during the deferment period (when loans are postponed).
- Direct unsubsidized loans with the borrowed amount determined by the school based on the cost of attendance and other financial aid being received. Interest is charged from the start of the loan and during the grace and deferment periods.
- Direct PLUS loans are unsubsidized federal loans for parents of dependent students and for graduate students. They can help pay up to the cost of attendance less other financial aid. Interest is charged from the start of the loan and will be capitalized.
It’s a good idea to first check into Federal loans to discover if one of these options might work better for you in the long term than a private student loan.
2. Private student loans are loans taken out personally, through institutions like a bank or credit union. Like other personal loans:
- Creditworthiness (including FICO® Score and credit reports) will most likely play a part in the lender’s decision.
- Interest rates will be higher than a federal loan and determined by past credit behavior and terms/options selected.
- Options are available so students, parents, guardians and spouses can take out the loan based on their creditworthiness.
When it comes time to repay
Post graduation, a student loan typically offers a “grace period” – six to nine months before the student (or borrower) needs to start repaying the loan. This time provides the borrower with some time to find the best repayment scenario to suit their situation.
Some of the options for student loan repayment plans include:
- Standard Plan – up to a ten-year term with a fixed payment amount each month
- Graduated Plan – up to a ten-year term during which payments start low in the initial years and increase in later years. Many students with low incomes (to start) who expect their income to increase over time use this type of plan. However, since more interest will accrue in the early years due to a higher balance, the borrower will end up paying more than with the Standard Plan.
- Extended Plan – typically a twelve to thirty year term, this plan allows for lower monthly payments than a Standard Plan because of the extended repayment period. Again, more interest accrues over this longer period of time, so more money will be spent paying off the loan.
- Income-based Plan – the monthly loan payment is based on annual income. So, as one’s income increases or decreases, so do the payments.
If economic hardship or other issues arise for which student loan repayment becomes impossible, it’s important to know that there are options. Lenders can help figure out the best option for specific cases – deferment, forbearance, cancellation – however, each have their own consequences which should be carefully considered before making a final decision.
Good news: if a borrower’s modified adjusted gross income is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan used for higher education. This deduction can reduce the amount of income subject to tax by up to $2,500.
Educate yourself some more at a forum where people are talking about their own student loan issues: MyFICO – where there’s always something to learn.