Taking on student loan debt as you work toward earning your degree is stressful enough. But trying to understand the types of loans, how interest works, and what repayment looks like can be overwhelming.
In this article, you’ll walk through a quick, no-math student loan guide. Then, the article will show you a few ways to reduce your student loan burden whether you’re in school or have already graduated. Generally, you’ll have different options to qualify for scholarships and grants or to manage the repayment of federal and private student loans.
How Does Student Loan Interest Work?
Borrowers can use student loans to pay for a four-year college or university, community college, or trade, career, or technical school. Federal student loans won’t require a credit check, while private student loans may require credit history or a co-signer.
Once you’re out of school, you’ll make fixed payments toward the loan’s principal borrowing amount, with interest charges against that amount every month. If you don’t pay the interest, it “capitalizes” onto your loan, meaning it’s added to the loan balance and interest continues to build on the new principal amount each month. This can prolong your repayment period.
Generally, to reduce the interest charges you owe on your student loan, you can either increase your monthly payments to pay down the loan’s principal (thereby reducing interest charges) or you can consider student loan refinancing for either your federal or private loans to find a more competitive interest rate.
Federal Student Loans
Federal student loans make up the vast majority of student loan debt. Students can see their federal loan eligibility by filling out the Free Application for Federal Student Aid (FAFSA).
In most cases, federal loans won’t cover all your school expenses. However, they tend to offer competitive interest rates and a standard repayment period.
You don’t have to begin repaying federal student loans until six months after leaving school or dropping below half-time enrollment (this is called your grace period). However, interest works slightly differently depending on the loan type.
Direct subsidized loans are given out based on your demonstrated financial need. Subsidized loans don’t accrue interest while you’re enrolled at least half-time in school. Instead, the Department of Education pays your interest. They also cover your interest for your grace period or if your loans are deferred.
Direct unsubsidized loans don’t require you to demonstrate any financial need. Unsubsidized federal loans start accruing interest immediately regardless of enrollment, deferment or forbearance. In most cases, you still don’t need to make payments until your grace period ends. However, the interest will capitalize on your loan if left unpaid, growing your loans while you’re in school.
Private Student Loans
Private student loans can potentially fill the gap if federal student loans don’t provide enough funding for all your educational expenses.
With private student loans, you might need a credit score. If you lack a credit score or credit history, you might need a cosigner, such as a parent or guardian.
Plus, some private student loans may require repayment right away. This can be tough to afford while you’re a student.
Ways To Make Your Loan Payments Easier
Scholarships and Grants
Scholarships tend to be merit-based. Qualifying to receive a scholarship may require a certain GPA or academic standing, volunteer experience, letter(s) of recommendation and a personal essay.
Grants are based on your financial need. The most common grant program students may encounter is the federal Pell Grant and Federal Supplemental Educational Opportunity Grant, both of which will typically be pursued in the course of applying for financial aid at a college or university through a FAFSA application. There may also be state-level grants available.
Federal Loan Repayment
Income-driven repayment plans are designed to provide you with a more affordable loan payment if you meet certain loan and income criteria. They’ll calculate your “discretionary income” using your total income, as well as the correct federal poverty guidelines based on your location and family size. Income-driven repayment plans, such as REPAYE, PAYE, IBR and ICR Plans, offer forgiveness after 10-25 years of on-time payments. Depending on your qualifying repayment plan PSLF may offer earlier forgiveness options.
Deferment and forbearance allow you to pause payments on your federal student loans under certain circumstances. For a deferment, you must meet specific criteria deemed a “qualifying event” such as being unemployed or enrolled in school. Mandatory forbearance is granted based on specific conditions such as being a member of the National Guard or the U.S. Department of Defense. Discretionary forbearance is at the discretion of the lender and does not require a special qualifying event but is typically capped at a year. The current mandatory forbearance due to COVID-19 is an obvious exception, as it has been ongoing since March 20, 2020.
Federal Loan Forgiveness
Loan forgiveness erases part or all of your federal loan balance, if you meet certain criteria.
The Public Service Loan Forgiveness program offers qualifying government (federal, state, city, tribal) and nonprofit employees loan forgiveness after 10 years on an income-driven repayment plan. Examples of potentially eligible roles include teachers, police, firefighters, military and social workers in public child or family service agencies.
There are numerous other government and private forgiveness programs for federal loans. They’re worth exploring because forgiveness can significantly ease your debt burden.
Student Loan Refinancing
Student loan refinancing involves paying off existing loans with a new loan at a potentially lower rate. As a result, you may reduce your monthly payment and potentially save thousands on interest over your loan term.
However, if you refinance federal loans into private loans, you may lose out on federal benefits such as income-driven repayment plans, deferment, forbearance and forgiveness opportunities.