Students graduating from high school or junior college often take undergraduate or graduate courses to pursue career goals. However, many need financial aid to pay for their education. Here’s what to know about student loans for financial aid guidance.
Types of Student Loans
There are two types of student loans: federal and private.
The government provides federal student loans at an interest rate set by Congress. Nearly everyone with a high school diploma is eligible to apply for a federal loan. Applicants complete the Free Application for Federal Student Aid (FAFSA). They don’t need good credit or a co-signer to get a federal loan.
There are four types of federal student loans:
- Stafford direct-subsidized loan – Available to undergraduate and graduate students, subsidized loans are reserved for students who demonstrate financial hardship. Their annual family income should be less than $50,000. Students earning these loans are not responsible for making payments until after they graduate. While you’re in school, the government pays the interest. The loan limit per student before graduation is $31,000. Only $23,000 of it can be subsidized.
- Stafford direct-unsubsidized loan – All students are eligible for this loan. Borrowers are required to pay the full interest amount for their loans, but payment is postponed until after graduation. The annual loan limit ranges from $5,500 to $12,500, depending on the year in school and if claimed as a tax dependent.
- PLUS loan – This loan is available for parents and graduate students. Parents can get PLUS loans if they have dependent undergraduate students. Grad PLUS loans are for graduate students. The PLUS loans do not have a maximum amount and are used for education amounts not covered by financial aid. Each type has a fixed interest rate.
- Perkins loans – This was a popular loan option for need-based college students, but the program was discontinued on June 30, 2018. Students who enrolled in the program before this date are still eligible for their loans.
Banks and financial institutions make private loans to undergraduate and graduate students. Before receiving a loan, a borrower needs a good credit score to prove they can repay it. A co-signer can help a student qualify for the loan. If the borrower can’t repay it, the co-signer is responsible for it. Borrowers will need to make arrangements to repay the loans after completion of a degree or coursework.
Federal loan repayment options
After graduation, or when a borrower is no longer enrolled in a college or university, it’s time to start making loan payments. For federal loans, there are eight repayment plan options. Here’s a brief overview of each type:
- Standard repayment – With this option, borrowers pay off their loans as quickly as possible. They have fixed payments for up to 10 years. The monthly payment amount could be more than other repayment plans, but borrowers save more on interest because the loan is paid off sooner.
- Graduated repayment – Borrowers initially have lower payments, with the amount increasing every two years. The repayment period is usually less than 10 years. It’s a popular option for employees entering the workforce. This plan gives them time to progress in their careers and earn a higher salary. But if they don’t receive the expected salary, they still will need to make higher loan payments.
- Extended repayment – This option allows borrowers to pay off their loans over 25 years. The monthly payment amount is graduated or fixed and generally lower than standard or graduated repayment plans. However, borrowers will end up paying more interest on the loan over time.
- Revised pay as you earn repayment – The monthly repayment amount is set at 10% of the borrower’s discretionary income. (Proof of income is required each year.) If all loans are for undergraduate studies, the repayment period is 20 years. If for graduate work, borrowers have up to 25 years. This option is good for people with large loans and modest monthly income. If the set monthly loan payment amount does not cover the interest payment, the government could subsidize it.
- Pay as you earn repayment – This plan is similar to the revised pay as you earn option. However, the amount is never more than what is owed under the standard repayment plan, even if personal income increases. The repayment period is up to 20 years.
- Income–based repayment – The monthly payment amount is set at 10% of monthly discretionary income. (It’s 15% for people with loans made on or after July 1, 2014.) Proof of income is required each year, but the monthly payment will never be more than the Standard Repayment plan. The repayment period is 20 years, if the loan is made on or after July 1, 2014, or 25 years of it was made before this date.
- Income-contingent repayment – This plan sets the monthly repayment amount as the lesser of 20% of discretionary income or what borrowers would pay in a plan with fixed payments over 12 years. The actual repayment period is 25 years. The plan only is available to borrowers with federal loans. It’s not an option for people who receive public service loans as employees of a federal, state, loan, or tribal government or not-for-profit businesses.
- Income–sensitive repayment – Low-income borrowers with federal loans could be eligible for this option. The repayment period is 10 years, and the monthly amount is based on the borrower’s annual income. The monthly payment can decrease or increase with income changes.
Borrowers should find out who owns their student loans to ensure they make monthly payments on time. Often, student loans are sold to different organizations. In some cases, the loan may be serviced by several lenders. Most loans are owned by large financial institutions, loan-serving companies, or the federal government. Banks who extend loans may receive incentives to sell their loans to other organizations. This frees-up money to make new loans and investments.
For federal loans, borrowers can find out the owner of their loan through the National Student Loan Data System. Follow the directions under the “Financial Aid Review” option.
People with private loans should check their credit reports to find out who owns their student loan.