As college costs continue to skyrocket most students find it nearly impossible to pay for their education without financial aid. Many have to rely student loans as part of their bid to afford tuition and other expenses.

If you are considering taking out student loans, make sure you understand the different loan types and the costs before you borrow. The loan decisions you make today will likely affect your finances for many years to come.

This guide can help you sort through the maze of options, exploring loan costs, requirements and repayment plans so that you can choose your loan wisely. This will help you achieve your educational goals without undermining other life aspirations, such as starting a family, owning a home, and pursuing the career of your dreams.

Federal Student Loan Types

Loan Type Perkins PLUS Direct Subsidized Direct Unsubsidized
Who can use it? Undergraduate students enrolled at least half- time, who demonstrate financial need and have exhausted federal direct loans Parents of undergraduate students enrolled at least half-time, or graduate/ professional degree students Undergraduate students enrolled at least half- time Undergraduate and Graduate students enrolled at least half- time
Who lends the money? The university or school U.S. Department of Education U.S. Department of Education U.S. Department of Education
Interest rate 5% 6.84%* 4.29% 4.29% for undergraduates and 5.84% for graduates
When does it begin to accrue interest? 9 months after you leave school -For parents: Once the loan is disbursed -For graduate and professional students: 6 months after you leave school 6 months after you leave school Immediately after disbursement
When does repayment begin? 9 months after you leave school For parents: Immediately after the entire loan is disbursed For students: 6 months after you leave school 6 months after you leave school 6 months after you leave school
Maximum subsidized amount available Not available Not available

-Freshman: $3,500

-Sophomore: $4,500

-Junior: $5,500

-Senior: $5,500

-Cumulative: $23,000

Not available
Maximum total amount available ( including unsubsidized amount)

-Undergraduates: $5,500 per year or $31,000 total.

-Graduates: $8,500 each year or $60,000 total.

The difference between the school’s tuition and fees and the amount received in other forms of financial aid

Dependent undergraduates: -Freshman: 5,500 -Sophomore: $6,500 -Junior: $7,500 -Senior: $7,500 -Cumulative: $31,000

Independent undergraduates: –Freshman: $9,500 -Sophomore: $10,500 -Junior:$12,500 -Senior: $12,500 -Cumulative: $57,500

Graduates or professional students: -$20,500 per year -Cumulative: $138,500

*This rate is for the 2015-2016 college year until rates reset on July 1, 2016.

**Perkins Loans are no longer available as of October 1, 2015. Those who are already approved for a Perkins loan will continue to receive the loan but new loans will not be available.

Advantages of each loan type

Type of loan Why consider this loan
PLUS PLUS loans cover the difference between how much a school costs and how much other financial aid the student has received.
Direct Subsidized Typically has a lower interest rate than other federal loans. Interest doesn’t begin accruing until after the student has left school.
Direct Unsubsidized Students aren’t required to make any payments while still enrolled half-time

Federal Student Loan Interest Rates

Interest rates on federal student loans are almost always lower than the rate on private loans.

Federal student loan rates change each academic year but most are fixed for the life of the loan. Generally, the loan rates are tied to a market benchmark, the 10-year Treasury note yield, plus a fixed margin. The rates are based on the last auction for the 10-year Treasury each May. These rates used to be set by Congress each year until the government changed the law in 2013. The change has made borrowing for school cheaper for many students.

Depending on the type of student loan you chose, the interest rate will begin to accrue immediately after the money is disbursed. That’s generally the case with direct unsubsidized and PLUS loans. Subsidized loans don’t accrue any interest until after you leave school and the grace period ends. This period varies between 6 and 9 months depending on the loan.

As you take out multiple loans while in school, it is likely that your loans will carry different interest rates. When you graduate may choose to consolidate your loans into one loan with a fixed rate.

Before you take out a loan, make sure you read your loan documents and understand your loan terms and understand the interest rate.

How to Apply for a Federal Student Loan

Applying for a federal student loan may not be the most fun way to spend an afternoon, but you can complete the paperwork carefully, completely and correctly by getting organized in advance and paying attention to details.

Here are the basic steps you must follow to obtain a student loan

Step 1Gather your documents and fill out a FAFSA

To be considered for any federal student loan, students must fill out the Free Application for Federal Student Aid (FAFSA). Because some federal loans are given on a rolling, first-come, first-served basis, aim to have this completed at the start of the calendar year. Dependent students will use their parent’s financial information, while independent students will use their own earnings, tax records and financial records.

Collect these documents and confirm that they are accurate and up-to-date:

  • Social Security card (or number)
  • Driver’s license (or number)
  • Alien registration number for non-US citizens
  • Investment and family asset documentation
  • Federal income tax records
  • Documentation of untaxed income
  • Federal student aid ID, or FSA ID, and Save Key (PINs are no longer valid)
Step 2Review the loan offer

After you have submitted the complete application, you will receive a financial award letter letting you know how much funding is available. Depending on any other private loans you may have applied for, you should review the loan paperwork; repayment terms and requirements; and think through the implications for your post-graduate life. Be sure you fully understand the agreement, especially when considering large loan amounts.

Step 3Accept or decline the offer

Once receiving and reviewing the offer and terms, contact your school’s financial aid department to accept or decline the loan offers. First time borrowers must complete the Entrance Loan Counseling session and sign the Complete Master Promissory Note. The counseling is intended to ensure that you understand what you are getting into with the loans and repayment.

Step 4Receive remaining funds

Once all paperwork has been satisfactorily completed, the school will disburse funding into the student’s account and apply it towards tuition, fees, and housing if the student is living on-campus. If there are any remaining funds after this step, they will be available directly to the student.

Career-Specific Student Loans

In some cases, student loans may be discharged or forgiven if the student is moving into a particular type of career. While these special loans are very specific and not for everyone, you might be able to avoid thousands of dollars of debt if you apply at the right time for the right loans and agree to the right conditions. Here are some of the biggest categories of loans with career-specific terms.

Teachers

The federal Teacher Loan Forgiveness Program was developed to encourage more students to enter the teaching profession.

  • In addition to loan forgiveness, the Department of Education also offers TEACH Grants of up to $4,000 each academic year for students planning to become teachers.

  • Borrowers who teach full-time for five consecutive years at an approved elementary or secondary school, or educational service agency, could be eligible for up to $17,500 of loan forgiveness.

  • Eligible loans for forgiveness include direct subsidized and unsubsidized loans, including the Stafford Loan. The program also requires teachers to be employed in an area qualifying for Title 1 funding, with 30 percent or more of enrolled students qualifying for Title 1 services. (Title 1 channels resources to school districts with high proportions of low income students.)

  • Most teachers might qualify to have $5,000 of their debt forgiven. Those who teach math, science or special education are considered “highly qualified” and can receive up to $17,500 in loan forgiveness.

  • The U.S. Department of Education offers a comprehensive guide on loan forgiveness for teachers.

  • 4 Student Loan Forgiveness Programs for Teachers // Teacher Loan Forgiveness Application

Source: The U.S. Department of Education

Military

The federal government offers a variety of loan forgiveness and repayment options for those enrolled in military service.

  • Members of the armed forces who have made 120 payments on their direct loans may be eligible for Public Service Loan Forgiveness, a program that eliminates the remaining balance.

  • In some cases, the Department of Defense may repay some of all of existing student loans; those who have a disability related to a period of active service may also qualify for having their loans discharged.

  • Active members of the military serving in a hostile area may also be eligible to have their Perkins Loan cancelled or discharged.

  • Federal Student Aid U.S. Armed Forces Handbook

  • Other helpful services include the possibility of interest rate caps, payment deferment, zero percent interest while serving in a hostile area, income-based payment plans, and the HEROES Act Waiver.

Source: The U.S. Department of Education

Healthcare

Ongoing shortages of doctors, nurses and health technicians have prompted incentives for those entering key health fields.

  • Depending on their role within the healthcare industry, some students may be eligible for Public Service Loan Forgiveness, a program that eliminates the remaining balance after 120 payments.

  • Eligible roles are related to public health and may include nurses, nurse practitioners, nurses serving in a clinical facility, or full-time roles considered to be a healthcare practitioner or support occupation.

  • The U.S. Department of Health and Human Services offers the National Health Service Corps, a tax-free loan repayment program that allows licensed providers to earn a maximum of $50,000 towards repayment during a two-year commitment.

  • Association of American Medical Colleges Student Loan Repayment

  • Depending on the area of work the student undertakes, they may be able to use a combination of both healthcare and nursing loan forgiveness programs.

Source: The U.S. Department of Education

Special Education

Teachers of special education are often eligible for numerous loan forgiveness and repayment options.

  • The Teacher Loan Forgiveness Program allows for teachers of special education to receive up to $17,500 towards loan forgiveness during a five-year, consecutive teaching position.

  • Loans eligible for forgiveness include direct subsidized and unsubsidized loans, including the Stafford.

  • Students with a Perkins loan can receive a 100 percent cancellation of their loan for teaching special education to infants, toddlers, children, or youth with disabilities.

  • Teacher Loan Forgiveness Program // Eligibility Quiz for Stafford Loan Forgiveness

  • If operating as a special education teacher, students meet “highly qualified” requirements to be eligible for the maximum amount of loan forgiveness.

Source: The U.S. Department of Education

Nursing

The rising shortage of qualified nurses has led the federal government to create a number of programs that help students moving into nursing professions receive loan forgiveness.

  • The Department of Health and Human Services offers the Nurse Corps program, allowing registered nurses to pay of 60 percent of their loan balance with a two-year service commitment.

  • To be eligible for Nurse Corps, students must be a licensed registered nurse, and be employed full time in an eligible facility experiencing a critical shortage.

  • Future nurses with a Perkins loan may also be eligible for up to 100 percent of loan discharge.

  • Further details about the NURSE Corps repayment program can be found in the Bureau of Health Workforce’s Application and Program Guide.

  • Depending on the area of work the student undertakes, they may be able to use a combination of both healthcare and nursing loan forgiveness programs.

Source: The U.S. Department of Health and Human Services

Private Student Loans

While federal student loans are offered directly by the government, private loans may come from a variety of funders, including banks, credit unions, schools, or state agencies. Most financial aid professionals tend to offer federal loans as a first option, as their interest rates are typically lower and the terms are in sync with students’ earnings capabilities.

Students are often drawn to private loans because, in theory, there’s no cap on the lending amount. Some private loans may also offer a lower interest rate, though these rates are often unfixed and may fluctuate greatly during the repayment period.

But also know that many of these loans will require repayment to begin even while in school, meaning you might need a part-time job while still in school just to keep up with the loan payments. And once you are out of school, private lenders are less likely to be flexible or forgiving if you run into repayment problems.

Private Student Loan Interest Rates

Private lenders are not required to have a capped interest rate, meaning some can be as high as 18 percent. These interest rates are also not fixed; while it may have a low interest rate at sign-on, this number can fluctuate greatly throughout the repayment period. Subsidized federal loans are made possible by the government paying interest rates on the student’s behalf while they are enrolled in school; private loans begin accruing interest immediately and compound over time.

Private Loans: A Case Study

Sarah attended a private, four-year liberal arts college where she was able to take advantage of federal student loans to cover most of her educational costs. However, Sarah also took out two separate private loans totaling $40,000 to cover room, board, and everyday expenses during her time in college. Because both of her private loans were unsubsidized, the loan amounts began accruing immediately, both with current interest rates of 10 percent. If Sarah plans to pay both of these off within 30 years, her average monthly loan payment during her first year of school would be about $351. Over the course of repayment, Sarah will pay about $126,370 to cover the principal and accrued interest just for the private loans.

Sarah’s Loan Summary

Private loan amount: $40,000
Interest Rate: 10 percent
Term 30 years
Average monthly payment 1st year: $351.03
Total payments over 30 years: $126,370

Tips if You Are Getting a Private Loan

1 Go Federal First

Before considering a private loan, make sure you’ve used all available federal funding first, as these loans will be less burdensome in the long run.

2 Know Your Credit

Because these loans come from banks, credit unions, or other private lenders, they often require a credit check. This number will likely dictate interest rates, and students holding a lower credit score will likely be required to pay higher rates.

3 Understand Interest

When possible, try to find a private loan offering a fixed interest rate, as those with variable rates can skyrocket over time.

4 Think Long Term

As evidenced in the case study above, interest rates make a substantial difference to the final loan repayment amount. Whether speaking with a financial advisor or using a loan calculator, make sure you understand exactly how much you’re agreeing to pay back.

5 Get a Break for Your Good Behavior

Similar to car insurance, some lenders offer lower rates or special perks as students age, grow their credit score, and prove themselves as good borrowers. Ask your lender if they offer any similar programs.

6 Stay on it

The worst thing you can do is get behind on your payments. While you may need to negotiate a lower amount as you get on your feet, it’s important to always be chipping away at the balance.

Student Loan Application Tips

Do Your Research

With so many loans available, don’t apply for any loan until you fully understand the terms and conditions.

Think Long-Term

It can be daunting to envision how getting a loan today affects your life decisions in a few years. After all, you are focused on getting the education you need for a better tomorrow. Be sure you understand how much you will be paying back each month and compare those loan payments to the rent, car payments and everyday living expenses you might reasonably expect to have when you graduate and start working. Will you have to take on an extra job to pay back the loan? Will you be able to afford a place of your own? These are the types of tough decisions that former students face when it is time to start paying off their loans.

Use a Loan Repayment Calculator

To get a better sense of the long-term responsibility of loan repayment, use a loan repayment calculator and plug in various repayment plans and interest rates. Most loan programs offer such calculators online.

Understand the Requirements

Subsidized versus unsubsidized, federal versus private – each type of loan has a different structure and varied requirements. A loan is a legal responsibility. If you aren’t sure what the loan documents say or mean, keep asking questions until you get clear answers.

Focus on Federal Loans

Most financial advisors suggest students make sure they’ve exhausted all federal loan options before approaching private lending programs. Because private loans typically begin accruing interest immediately after disbursal and don’t usually offer benefits such as loan forgiveness, federal loans tend to be a safer bet.

Keep in Touch

It’s okay if you need help or a little more time after graduation before you begin repaying your loans. Most lenders offer programs such as loan forbearance or deferment that can give you a bit of breathing room to transition from student to career professional before shouldering loan repayments. The most important thing is to stay in touch with your lender and let them know what’s going on.

Your Life With Loans After Graduation

By now, students should have a foundational understanding of federal versus private loans and the advantages and disadvantages of both. Even armed with this information, students may still find themselves overwhelmed by debt. One of the biggest problems comes from borrowing more than is actually needed, especially from private lenders. As of 2014, nearly 14 percent of student end up defaulting on their loans.

Student Debt by the Numbers

The average student from the class of 2015 graduated with $35,000 in student debt, the highest amount ever.

The average amount for all graduating students is $25,000.

The average amount students pay for their student loans is $280 per month, based on a $25,000 loan, with a 10-year, 6.8 percent interest rate repayment plan.

At this rate, students will pay close to an additional $9,500 in interest on top of the principal balance.

Loan Consolidation: Pros & Cons

Loan consolidation occurs when multiple loans are combined into a new, single loan with the one interest rate.

Consolidating federal loans brings advantages and disadvantages:

Federal Loans
  • Advantages
  • Can lower monthly payments, allowing students up to 30 years to pay off principal.

  • Moves payments into a single bill rather than multiple monthly bills.

  • Could allow for other repayment plans not available previously.

  • Rather than having various interest rates, moves all payments to one, fixed rate.

  • Disadvantages
  • Students could lose initial borrowing benefits, including interest rate discounts or loan forgiveness.

  • By extending the payment term, students will be required to pay more interest throughout the years.

  • Once consolidated, students can’t go back to the original setup if they decide they don’t like the consolidated loan.

Consolidating private loans also brings advantages and disadvantages:

Private Loans
  • Advantages
  • Refinancing a private student loan may create a lower interest rate.

  • Students with no credit history or low credit scores may be able to bring on a co-signer to help reduce interest rates.

  • You might be able to build a strong credit history and boost your credit score as you are repay the loan while still in school, and that will make it easier to get a lease or loan when you have a job.

  • Disadvantages
  • Private loans have no income-based repayment plans.

  • Loan forgiveness programs are generally not available.

  • Unlike federal loans, there is no guaranteed discharge, even in the event of death or disability.

  • Consolidating private loans often results in stretching out the payment period by years, which means you will pay more interest over the long run.

What Happens If You Can’t Pay?

Whether you graduate or drop out, land a great job or can’t find any job, you have to repay your student loans. Recent economic conditions have made it hard for many former students to earn enough to repay their loans promptly, and a number of programs now offer ways to work with lenders while you get established financially.

Forbearance

This measure allows students to postpone loan payments temporarily while getting on their feet; it may also reduce payments for a set amount of time.

Deferral

If you can’t pay your loans temporarily, deferment lets you put off payments for a defined span of time. In the case of subsidized federal loans, the interest also stops accruing during that time.

Collections

A loan moves into collections when a student has not paid on a loan nor made satisfactory alternate arrangements. Often, a debt collection agency takes responsibility for contacting you and for trying to work out a payment plan.

Tax Refund Seizure

Once a loan goes into collections, the government may opt to withhold or seize income tax returns or other federal payments to collect due money. They may also seize wages.

Additional Resources

Student Loans Questions & Answers

Rosemary Ferrucci is the Associate Dean for the Office of Financial Aid at New York Institute of Technology. Here’s her take on how students can make the most of student loan programs and avoid missteps.

1

What are the biggest mistakes students make when getting a student loan?

The biggest mistakes are students frequently make are not paying attention to associated rates and fees; not projecting the escalating loan burden for the length of the degree (that is,three to four more years with possible increased borrowing due to annual increases in tuition charges); and not educating themselves on the difference between a federal education loan and a private alternative loan and the subsequent implications of repayment for each type.

2

How do I know how much money I’ll need?

Sit down and construct a budget each year that accurately reflects costs that must be paid directly to the institution. Subtract out any payments you can make and any grant or scholarship funding you have been awarded. Check if there is a payment plan that you can utilize through the school that does not charge interest. Whatever the gap is, this should be your estimated level for borrowing.

3

Do you recommend federal or private loans? Why?

Federal loans are the safest and offer the most protection for the student. The repayment options are flexible and becoming more student-focused and the in-school options are quite similar to private loans. Private loans are from business-focused lenders and reflect that in the structure. They need to be carefully scrutinized prior to commitment.

4

How do lenders and the government decide how much money I’m eligible for?

Federal loan amounts are preset. Private loan amounts are more fluid. The government allows amounts based on grade level (e.g. freshman, sophomore, etc.) or a maximum ( e.g. cost of attendance for a PLUS loan) eligible amount.

5

Should I consolidate my loans while still in school?

When you consolidate you are taking a whole new loan and you have short-circuited your grace period by paying off the original loan with the new one. That is risky. There should be much research and consideration prior to consolidating a loan in school so as not to lose the grace period prior to repayment.

6

How do I choose the best type of loan?

Federal loans are the best as the Federal government backs them. Read up on them and the options to repay. Educate yourself even more on any other type of loan before you sign on a dotted line.

7

What happens if I go into forbearance or deferment?

Forbearance and deferment allow students a short, set amount of time where loan payments either stop or decrease, allowing them to get on their feet and prepare for future payments.

8

What are the benefits of special loans for qualified careers, such as teachers or nurses?

For students who plan to pursue a degree in public service, healthcare, teaching, nursing, or similar areas, the federal government offers a number of options to either forgive or lessen their debt. If a student is passionate about this type of work, it can be a great way to alleviate substantial amounts of debt.

9

What’s the number one best piece of advice you can give to students considering their loan options?

Do your research! Talk with professionals and school counselors at your school’s financial aid office, and read the federal loan websites closely about the pros and cons of each option. Project out your debt obligation for the next four to 10 years in repayment and keep track of that. Be reasonable about your borrowing, but remember you are investing in your future income through your degree attainment.

Help Beyond Federal Student Loans

Dos and Don’ts

Student loans, whether federal or private, can be confusing and confusion can result in unwise decisions. Consider these tips for navigating this tricky process.

DO
  • Apply for the amount of money you need to cover college.

  • Make payments as soon as you can, especially on unsubsidized loans that are accruing interest from the moment of disbursement.

  • Ask questions! Student loans are confusing; if you don’t understand something, ask for clarification.

  • Understand the terms and conditions of each and every loan you take out, as there will be variances within each one.

  • Figure out which repayment plan is best for you. It may sound nice to pay off all your loans within five years, but if you set the amount too high then you’ll likely get overwhelmed. Set a manageable monthly amount.

DON’T
  • Be tempted to apply for more just because it’s available.

  • Ignore loans and hope they’ll go away. You have to keep up with payments or you could quickly find yourself in a deferment or collections situation.

  • Assume you know the ins and outs. Student loan agreements and requirements are constantly changing, so what was true last year may not be this year.

  • Take too much time off from formal enrollment in school. Students who take more than a semester out will be required to start paying on their loans.

  • Forget to take advantage of tax credits or deductions. Taxpayers can often write off up to $2,500 in annual student loan interest.

Additional Resources & Help

Thankfully, there is a bounty of resources available to help students understand the variety of loans available, compare their options, and pick the best one suited to their needs. Some of the most helpful resources include:

Consumer Financial Protection Bureau

The CFPB is an invaluable resource for students seeking guidance and protection while understanding how to repay their student loans. The site also provides up-to-date information about changes within student loans, including both federal and private.

Federal Student Aid

This one-stop website provides answers to any question students could possibly have about federal loans, including how to apply, requirements and qualifications, special forgiveness programs, and loan repayment services.

Student Loans

This website is often the first stop for students seeking federal aid. Here, individuals can complete the FAFSA, undertake entrance counseling, complete the Master Promissory Note, and learn more about how to repay their loans.

Student Loan Glossary

Accrual
Interest starts accruing, or adding up, according to a timetable specified in the loan documents and terms. Some loan plans start charging interest only after you have graduated or left school. Others start charging interest even while you are in school. When and how interest accrues is a key term of a loan.

Adjusted Gross Income
This information is used by federal lenders to determine if a student is eligible for an income based repayment plan of an economic hardship deferment.

Borrower
The legal term for the person whose name the loan is held in.

Capitalization
Capitalization occurs when any accrued interest is added to the principal loan balance.

Consolidation
Used for both private and federal student loans, multiple loans can be consolidated into one monthly payment with a single interest rate.

Default
A loan goes into default when a student fails to repay a loan according to the set agreement for at least 270 days.

Deferment
Occurs when the student is given an authorized temporary period where they are not required to make payments. In the case of subsidized loans, the interest stops accruing.

Delinquency
A loan becomes delinquent when a student fails to make monthly loan payments by their due date.

Direct Debit
This is an option that allows lenders to automatically deduct monthly payments from the borrower’s account. In some cases, lenders may give a small discount for those who use direct debit.

Disbursement
This is the act of providing the student or their school with the loan amount they are eligible for; it is also used as the starting date for interest accrual.

FAFSA
The Free Application for Federal Student Aid must be filled out for students to be considered for any form of federal aid.

FFELP
The Federal Family Education Loan Program offers a variety of subsidized and unsubsidized loans that are offered through private lenders but guaranteed against default by the federal government. These include Stafford loans, PLUS loans, and consolidation loans.

Fixed Interest Rate
This is a guaranteed interest rate for the life of the loan, which cannot fluctuate unless the loan is consolidated.

Forbearance
May take the form of either a temporary reduction of monthly payment or a dismissal of payments. Regardless of subsidy status, interest rates continue accruing.

Grace Period
In the case of Stafford loans, students are given a six month grace period after leaving before they must begin repaying loans.

Lender
The legal term for the organization responsible for disbursing funds.

Paperless Billing
Rather than receiving monthly paper bills in the mail, these online statements provide updates on your loan status.

Principal Balance
This figure includes both the original loan amount and any additional fees. It does not include accrued interest.

Promissory Note
Also known as a Master Promissory Note, this document is the legal and binding contract used for federal loans.

Subsidized Loans
The federal government pays the interest on subsidized loans while the student is enrolled at least half-time.

Unsubsidized Loans
Offered as both federal and private loans, the interest begins accruing at the moment of disbursement on unsubsidized loans.