As much as we’d like to avoid them, student loans often open up numerous possibilities to students shopping for college. Getting through school without them is a privilege shared by few students these days, and if managed in the right way, they can be your friend instead of your foe.
Hopefully, your plan to pay for college includes other strategies as well, but in this article, let’s hone in on some student loan basics and good rules of thumb to keep in mind if you’re shopping for one.
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Federal Student Loans
Federal student loans are the first choice if you need to take loans. Also, since you are limited in the amount of federal loans you can take each year, if you need to take the maximum for undergraduate school - $31,000 for dependent students, you should be sure to spread out your federal loans over all four years of school. Remember to fill out your FAFSA as soon as possible following October 1, which is the first date you can apply. Also, you’ll need to submit an updated FAFSA every year - so don’t forget!
You’ll find everything you need to know about Federal Student Loans at StudentAid.gov and the US Department of Education website.
Private Student Loans
Private student loans are used when you need even more for college each year than you can get from the federal loan program. They have less flexibility around repayment and may have higher interest rates and more stringent qualification requirements. You’ll want to compare lenders at sites like:
They’ll compare different lenders and give you some of the pros and cons for each. Before you make a decision, you’ll want to go deeper with your research by getting complete information on the loan terms and find out more about the reputation of the lenders you’re considering. Here are links to some you might be looking into:
You may need expert help if you think you’ll need to take out more in loans that you’ll make your first year after graduating.
Student Loan Calculator
It’s extremely important to calculate how much your student loan payment will add up to once you graduate before accepting loans to attend school. A good rule of thumb is to take no more in loans than you expect to earn your first year out of college. Be realistic about that starting salary - do your homework to find out what the going rate is for your field in the geographic area where you plan to live.
You’ll find plenty of student loan repayment calculators online like the following:
Federal Student Aid Loan Simulator (This one is specifically for Federal Student Loans)
Student Loan Repayment
It’s important to be proactive about paying back your student loans. Put reminders on your calendar just in case you don’t get a notice about making payments. Depending on the type of loans you have, you may be incurring interest charges all along, so even when you don’t have to make payments, your balance may be creeping up because of the interest.
For the same reason, when you choose a repayment plan, be aware that some of the Federal Student Loan repayment plans don’t cover the interest charges, meaning that your balance could be creeping up even while you are actively repaying the loan. That may be ok if you are planning to make payments for the long haul (until you qualify for loan forgiveness), but if you want to get the loan paid back and pay as little as possible in the mean-time, you’ll need to choose a plan that covers the interest and then some. You can check the loan amortization to make sure the principal balance is going down gradually over time.
Student Loan Payment
For private loans, you’ll need to make sure you understand the repayment terms and find out if there is any flexibility when you take out the loan. Federal Loans provide lots of options that you can read about here.
You may need expert help if you don’t know if you’ll be able to afford your loan payments after graduation or you’re having trouble figuring out how much you’ll need to borrow for all four years of college.
Student Loan Refinance
Refinancing your student loans is done with private student loan providers. It’s a good idea to make sure you weigh the pros and cons of the refinance depending on what you’re trying to accomplish. If you’re looking to lower your payments, you can make that happen by refinancing at a lower interest rate and/or extending the loan for a longer repayment term. If you extend the repayment term, you may end up paying more over time, so just keep that in mind.
Remember to compare your refinance options and make sure you’re getting the best terms you can. Always read all the fine print when entering into a new financial obligation.
If you refinance your federal student loans with a private lender, you may lose some of the flexibility that you have with the federal loan, so make sure you’re not giving up anything that will cause you to regret your decision later.
You can compare some of your options at places like:
Student Loan Consolidation
A lot of students do end up consolidating their student loans so they don’t have so many to manage. Also, you may find that a consolidated federal student loan has repayment options that you can’t get with your unconsolidated loans. Find out more about consolidating your federal loans here.
You may need expert help if you don’t see a way to get your student loans under control and also work toward your other financial goals.
Student Loan Forbearance
There are a number of circumstances that might make forbearance an attractive option for you for awhile. You will need to contact your loan servicer to request the forbearance. In a lot of cases, interest will continue to accrue, so your loan balance may actually go up during the forbearance causing you to pay more over the life of the loan than without the forbearance. Paying at least the interest will help. Also, you can check out other repayment plans to see if switching plans helps you avoid forbearance.
If you need a forbearance from a private student lender, you’ll have to read your contract or contact your lender to see what is available to you. Private lenders can set their own terms and requirements. Learn more about private lenders and forbearance here.
Student Loan Debt Cancellation and Student Loan Forgiveness
There are a number of ways that federal student loan balances can be cancelled or forgiven. Some require you to work for a non-profit, live in a specific geographic area and pay qualified loan payments for a given period of time. Read all of the requirements very carefully and check and double check with your loan servicer to make sure you are on track for cancellation or forgiveness.
Student Loan Forgiveness and Covid
Because of Covid 19, federal student loan payments have been in forbearance and are scheduled to remain so until January 31, 2022 at the earliest. This is not the same thing as forgiveness, the loans will still have to be paid back. Check with your private student loan lender if you have questions on the status of your private loans.
One good thing about the current Coronavirus related forbearance is that interest is not accruing for federal loans. This is an unusual circumstance, though, so don’t count on having this happen again in the future. It may, but it also may not.
If you are in forbearance on your loans right now, go ahead and start factoring those payments into your cash flow planning. If you can, start making payments ahead of time to get back in the habit. Those payments will go 100% toward principal, so they will help you pay down your loan faster!
You may need expert help if you’ve figured out your student loans but don’t have a comfortable amount in emergency savings or you're not sure how to save for other financial goals.
At 21Finance.xyz, I help young adults and their families make good financial decisions while shopping for college, attending college, and getting started in their careers. With a good college plan in place, I can help you and your family avoid making a financial decision that puts you in a position of financial stress for years to come, which is very commonly the case when it comes to student loans.