Outsmarting Student Loan Debt

By Madeline Martin on Friday, May 14, 2021

Student loans can be confusing. Before taking out loans for school, you must understand exactly what you’re borrowing. We’ve provided an overview of federal student loans and the importance of repaying them on time.

What Are Federal Student Loans?

Federal student loans are sums of borrowed money from the U.S. Department of Education’s Federal Loan Program that you must pay back with interest. These loans must be used towards education expenses, such as tuition, room and board, fees and books.

The two types of federal student loans and their interest rules are:

• Direct Subsidized Loans. Available to eligible undergraduate students who demonstrate financial need to help with the costs of higher education.

Interest: Covered by the U.S. Department of Education while you’re in school, during a six-month grace period after graduating or during deferment (postponement of loan payment).

• Direct Unsubsidized Loans. Available to eligible undergraduate, graduate and professional students and based on the cost of attendance and other financial aid received rather than financial need.

Interest: You are responsible for paying the interest on these loans during all periods.

How COVID-19 affected interest
To provide relief to student loan borrowers during the COVID-19 pandemic, interest is temporarily set at 0% on federal student loans. Also, borrowers are not currently required to make monthly loan payments. This will last until Sept. 30, 2021. However, you can still make payments if you choose.


Federal Loans vs. Private Loans

When it comes to student loans, federal aid is the best option for college students. In comparison to private loans, which are provided by a private organization (such as a bank), federal loans are dependent on need rather than credit.

There are several benefits to federal loans for college students:

1. Fixed interest rates are much lower than private loans.

2. No credit check or co-signer is required for most federal loans.

3. You don’t have to begin repaying your federal loans until after college.

4. Flexible repayment plans and options to postpone payments.


9%
of borrowers who attended public colleges were behind on their payments, as of May 2020.
(Education Data)


What is the Payment Timeline?

Luckily, federal student loan borrowers get a six-month grace period before they have to begin making payments. This is the perfect time to choose a repayment plan and figure out how you will go about paying. If you get behind, you can discuss different payment plans with your loan service provider. Financial experts say that the ideal timeline for repaying student loans is about 10 years, but it varies depending on your occupation and income.


69%
of college students took out student loans.
(Student Loan Hero)


What Happens if You Don’t Repay Your Loans?

If you fail to pay the amount due on your bill by the due date, it becomes delinquent. Your loan account remains delinquent until you pay the balance or make other arrangements, such as deferment, forbearance or changing payment plans.

If your loan delinquency continues, it risks going into default. The point at which a student loan is considered in default varies depending on the loan type. Defaulting can have serious consequences on your finances:

• Acceleration: The entire unpaid balance of the loan plus interest becomes due immediately.

• Inability to receive deferment, forbearance or a different payment plan.

• Loss of eligibility for additional federal aid.

• Damage to credit ratings, which can affect future ability to buy a car or house, or open a credit card.

• Risk of being taken to court by your loan provider.


11.2%
of borrowers reported they were unable to make their payments by July of the first payment year.
(Education Data)


Start Planning Early

Start planning out how you’ll pay for college before you begin. Look into federal aid and understand what options are best for you. Secure your financial future by selecting the right repayment plan.

Fill out the Free Application for Federal Student Aid (FAFSA) before applying to college and every year while in school to determine your federal aid eligibility. Wait for your financial aid offer, decide how much money you need to borrow and wait to hear from the financial aid representative at your school. Your Federal Student Aid account will make it easy for you to track your balance, check your interest amount and make payments.