How to Be Smart With Student Loans: Everything You Need to Know

Learn how to choose student loans and manage student loan debt the right way to protect your financial future

If you’re a senior deciding which college to attend this fall, I’m sure finances are one of the many things on your mind. You’ve compared your different financial aid award letters, but your aid doesn’t cover everything. So you’re thinking about student loans.

But where do you start? What are your student loan options? You want to graduate with as little student loan debt as possible. But which student loans are best? How can you avoid making student loan mistakes?

Hang in there. This is a tough topic, but I’ll answer those questions and more to help you make wise financial decisions about student loans.

Keep reading to explore different student loan types, learn about student loan interest, and discover how to repay your student loan debt the smart way.

Federal student loans: subsidized vs. unsubsidized

Here’s the scoop on federal student loans, which should appear as “Direct Stafford Loans” on your financial aid award letters.

  • Federal student loans are offered by—you guessed it—the federal government.
  • Every student who submits the FAFSA qualifies for federal student loans, regardless of their credit score.
  • College students don’t have to make payments on their student loans as long as they’re enrolled full- or half-time. This is a great benefit!
  • Students receive a six-month grace period after they graduate or leave school before they have to start making payments.

Now, federal student loans are usually the best loans available to you, but the amounts you can use are limited. Here are the federal student loan limits according to class standing. 

  • Freshmen: $5,500 
  • Sophomores: $6,500 
  • Juniors and seniors: $7,500 

Okay, you’re with me so far. But you see some other loan terms on your financial aid award letters you don’t understand. Let’s explain those.

Subsidized vs. unsubsidized loans

Subsidized loans are based on a student’s financial need as determined by the FAFSA. The best thing about subsidized loans is the government pays off (or subsidizes) your interest while you’re in college. But depending on your family situation, you might not qualify for a subsidized loan.

Unsubsidized loans are offered to every student, regardless of financial need. And unfortunately, the government doesn’t pay interest on these loans while you’re in college, so you’ll have to. Unsubsidized loans start accruing interest from the first day they’re added to your student account.

So while a subsidized loan will sit quietly while you’re in school, an unsubsidized loan will actually grow steadily unless you start paying off that interest early.

Federal student loan interest

Speaking of interest, you might be wondering what the interest rates on these federal student loans are. This past year, the interest rate was set remarkably low at 2.75% because of the COVID pandemic. In previous years, interest rates have been around 4 or 5%. 

It’s important to know the Department of Education changes the federal student loan interest rate every year. However, whatever the interest rate is during the year you accept a loan, you’re locked into that rate for the life of the loan. 

So maybe you can get a federal student loan interest rate of around 3% this year. That’s great! Just be aware the loan you take out next year might have a higher interest rate. Four years of student loans can have four different rates. It’s a headache, I know!

Parent PLUS Loans

You might see a Parent PLUS Loan on your financial aid award letter, or maybe you’ve just heard about it and wonder what it is. Here are the details.

  • Parent PLUS Loans are offered by the federal government. 
  • Not surprisingly, parents take out these loans rather than college students. So your parent will have the legal responsibility to pay this loan back—not you.
  • Parents can choose whether or not they make payments while you’re in college, plus they have a six-month grace period after you leave school before payments become mandatory.

We learned federal student loans have maximum limits, but what about Parent PLUS Loans? The maximum amount is determined by the gap between your financial aid and the total cost of attendance. So Parent PLUS Loans can range anywhere from $1,000 to $50,000 or more (yikes!).

But there are a few reasons why Parent PLUS Loans aren’t as great as federal student loans.

  • The interest rate is usually higher than for student loans—it was 5.3% last year.
  • Interest accrues on Parent PLUS Loans while you’re enrolled in college.
  • Parent PLUS Loans aren’t guaranteed to everyone—your parent must apply for the loan and could be denied if they have a poor credit history.

Parent PLUS Loans can be a good option if you have a small gap between your aid and your cost of attendance. But you don’t want your parents to be saddled with massive amounts of debt on your behalf! So be smart and be cautious.

Private student loans

Federal student loans are your best options, and Parent PLUS Loans are your second best. Now we come to private student loans, which should be your last resort. Here’s what you need to know:

  • Private student loans are usually offered by banks, credit unions, or private student loan lenders.
  • You apply to take out private student loans yourself, but the approval is based on your credit score—typically you’ll need a credit-worthy cosigner to get approved.
  • Private student loans usually accrue interest while you’re enrolled in college.
  • Depending on the loan specifics, you may have to start making payments while you’re in school. Although, some loans will give you the option to wait.

Here’s one of the biggest reasons I’m wary about private student loans—the interest rates are usually much higher than federal student loan interest rates. Rates are based on the credit scores of you and your co-signer, and they can range from 3% to 14%. 

If you take out a $10,000 loan with a 10% interest rate and repay it in 10 years, you’ll pay nearly $6,000 in interest. That’s over half of your original loan amount! 

I’m not a big fan of private student loans, but if you decide they’re right for you, make sure you shop around and do your research. You can use the ELMSelect tool to compare private student loans and a student loan interest calculator to run the numbers. Get informed and be smart!

Repaying your student loans

If you (or your parents) take out student loans to pay for college, it’s important to start thinking about repayment early on. That way, you’re prepared to manage your loans wisely when you graduate.

Each federal student loan and Parent PLUS Loan is assigned to a loan servicer who handles your repayment process. That means you’ll interact directly with your loan servicer, rather than the federal government that lent you the money. 

You’ll create an online account with your loan servicer or private student loan lender to monitor your loans and make your payments. And you’ll work with them to select your repayment plan. Here are the most common options:

  • Standard repayment plan—you’ll pay off your loan in 10 years, and your payments will be split into a fixed amount to match that timeline.
  • Graduated repayment plan—you’ll pay off your loan in 10 years, but your payments will start out low and increase every 2 years. In theory, your income should increase along with your payments.
  • Income-based repayment plans—your payments are calculated each year to be about 15% of your income. If you make regular payments for 25 years, the remainder of your student loan debt is forgiven. This option is best for graduates who have extremely high amounts of student debt (think $100,000 or more).

You don’t have to choose your repayment plan now, but you should be aware of your options and consider how each one will affect your adult life.

Student loan deferment and forbearance

Here’s a bit of good news about student loans. If you have a qualifying life event, you might be able to temporarily pause your loan payments through deferment or forbearance.  

You have to apply through your loan servicer and give proof of your situation. These are a few of the life events that usually qualify for deferment or forbearance:

  • Enrolling in graduate school
  • Getting a new job
  • Having a child
  • Experiencing a financial hardship

In fact, all federal student loans are currently in forbearance due to the effects of the COVID pandemic. Borrowers can still make payments if they’re able, but they don’t have to until September 2021.

Important student loan tips

Here are a few final tips I’ll share to help you be smart about your student loan options.  

  • Always take out the smallest amount of student loans possible to avoid getting into large student loan debt.
  • Make small payments while you’re still in college—at least enough to cover the student loan interest.
  • Consider the student loans you’ll need for all four years and try to stay under the national average student loan debt amount of $32,000.
  • Begin paying back your student loans as aggressively as you can right out of college to save on interest and reach financial freedom more quickly.
  • If you qualify for deferment or forbearance, continue to make payments if you can—even if they’re small.
  • Explore student loan forgiveness options—many programs are available for graduates who work in public service areas.
  • Consider refinancing or consolidating your student loans after graduation so you can secure a lower interest rate and save yourself money in the long run. 

Final thoughts about student loans

Student loans are tricky, but for many college students, they’re still necessary. If you need to take out student loans to pay for college, I hope the information and tips I’ve shared will empower you to be smart about it.

Do you have any other questions about student loans I didn’t cover? Please drop them in a comment below, and I’ll be happy to answer the best I can!

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