Student Loans 101
by Jorge Santiago
College is expensive. In the 2020-2021 academic year, the average private college’s tuition and fees was $35,087; public colleges averaged $21,184 for out-of-state students and $9,687 for in-state students. Multiply that by at least four years, and the total cost of a degree is one very few students — or their families — can afford out-of-pocket.
That’s where student loans come in. Student loans create opportunities for students who might not otherwise be able to afford their education, which can in turn lead to more stable, gainful, and fulfilling employment.
But student loans are just that — loans that must eventually be paid back. If you’re one of the 47.9 million Americans carrying a combined $1.71 trillion in student debt, you probably already know that repayment can be a strain. And if you’re considering applying for college loans, you should understand your options before taking on student debt.
So let’s get back to the basics. Here are four questions everyone with student debt — or considering taking out student loans in the future — should know how to answer:
What types of student loans are available?
Types of federal student loans
As their name suggests, federal student loans are offered through the federal government via the Department of Education’s Office of Federal Student Aid (FSA). Three different types of federal student loans are available: Direct Subsidized, Direct Unsubsidized, and Direct PLUS.
- Direct Subsidized Loans are available for undergraduate students with financial need (the difference between your school’s cost of attendance and your household’s expected contribution). Interest rates are fixed for life when the loan is first disbursed and are generally lower.
- Direct Unsubsidized Loans are available for both undergraduate and graduate students, regardless of financial need. Interest rates are fixed for life when the loan is first disbursed and are generally higher.
- Direct PLUS Loans are available to parents financing their child’s education, and to graduate or professional students funding their own education. The application process requires a credit check, but borrowers with low credit scores can still qualify if they have an endorser or can document extenuating circumstances. Interest rates are fixed for life when the loan is first disbursed and are generally the highest rate compared to other federal student loans.
Types of private student loans
Private student loans are offered through financial institutions like banks and credit unions. The terms of private student loans are controlled by the lender, so there are lots of different options available. Private loans often entail higher interest rates and stricter eligibility criteria, but they can be a helpful tool for borrowers who have already maxed out their federal aid.
How does student loan repayment work?
Federal student loan repayment
If you have federal Direct Unsubsidized or Direct Subsidized Loans, your loans will be in deferment while you’re still in school and for six months after you graduate or withdraw. After this grace period ends, you’ll be responsible for making monthly payments through your loan servicer (FSA will assign your servicer — a third-party company that manages student loan billing — after your first loan is disbursed).
Direct PLUS Loan borrowers can expect a very similar process, with the exception that you must request deferment through FSA or your student loan servicer. Otherwise, you’ll have to start making payments while you are or your child is still in school.
All federal student loan borrowers will have the opportunity to select a repayment plan when they first start making payments and adjust their repayment plan later on. There are eight different federal student loan repayment plans available, including income-driven repayment plans, which cap monthly payments to a manageable percentage of your discretionary income.
Private student loan repayment
Private student loan repayment varies based on your lender’s terms. Some require payments while you’re still in school or immediately after graduating, some manage repayment through a servicer or in-house, and repayment plans vary. If you’re considering private student loans, be sure you understand the lender’s repayment policies.
Can I get my student debt cancelled, paused, or forgiven?
If you have private student loans, your options for getting your loans cancelled, paused, or forgiven are limited.
But if you have federal student loans, it’s possible — provided you meet certain eligibility requirements.
You may be eligible to have your federal student loans partially or totally cancelled if:
- Your school closed while you were a student or shortly after you withdrew or graduated
- You develop a total and permanent disability
- You were defrauded by your school
- You declare bankruptcy
You may be eligible to have your student loans paused if you apply for and are granted temporary deferment. You might qualify for deferment if:
- You’re enrolled in a graduate fellowship
- You’re undergoing cancer treatment
- You’re serving in the Peace Corps
- You’re on active military duty
- You’re receiving welfare assistance
- You work full-time but earn 150% below the poverty line
You may be eligible to have your student loans forgiven through special forgiveness programs if:
- You’re a teacher
- You work at a nonprofit organization
- You work for a federal, state, local, or tribal government agency
- You’ve been on an income-driven repayment plan for at least 20-25 years
How can The Milford Bank help me manage my student loans?
When it comes to student debt, you don’t have to go it alone. The Milford Bank is excited to launch a new partnership to give our customers tools that make managing their student loans easier than ever before. Stay tuned for an announcement soon!