Understanding Student Loan Debt

What makes student loans unique?

Student loans are unique because it’s one of the only types of credit you can get without needing good credit.

You also don’t start paying them back immediately. In fact, you are not required to pay anything while you are in school.

You apply for federal student loans through the Free Application for Federal Student Aid (FAFSA). You get approved for federal student loans based on your financial need.

There are also federal loans for parents to help them pay for their children’s school.

But as Jilliana talks about in the video, it’s best to avoid student loans as much as possible. You want to find other ways to pay for school, so you keep your student loan debt as low as possible for when you graduate.

How student loans work

1. As you get ready to go to college, you will complete the Free Application for Federal Student Aid (FAFSA).
2. Once your application is reviewed, you will receive an aid package that will have information on all the aid that you qualify to receive. That includes:
   1. Grants, which are money for lower-income students that don’t need to be paid back.
   2. Work-study programs, which allow you to work part-time in specific jobs while you attend school. You earn money that pays for college expenses.
   3. Federal loans, which you are required to pay back once you graduate, leave school, or drop below half-time enrollment.
3. Federal loans come in two types:
   1. Subsidized loans are loans where the federal government pays the interest charges that accrue on the loans while you attend school. So, your balance doesn’t increase as you get your education.
   2. Unsubsidized loans are loans where interest charges get added while you attend school, so the amount of debt you owe increases over time.
4. Federal loan money can be used to pay for tuition, books, housing, and other daily expenses while you attend school.
   1. You are not required to make payments as long as you’re enrolled in classes.
5. Once you graduate, leave school, or drop below half-time enrollment, your student loan payments will begin.
   1. Payments usually start about six months after you graduate.

Student loan interest rates

Another unique thing about federal student loans is that your credit score doesn’t affect the interest rate. The rates are set by the federal government each year.

So, whether you have bad credit, good credit, or no credit, every student that takes out loans each year gets the same interest rate on their loans.

As we say above, unsubsidized loans grow with interest while you are in school. So, if you have unsubsidized loans, you may borrow $20,000 to go to school, but your debt will be much higher by the time you graduate.

Paying off student loan debt

• There are repayment plans that make repaying student loan debt easier.
  • If you have federal loans, you can combine them into one repayment plan, so you only have one bill to worry about.
  • Some plans match the payment to your income, so you avoid spending most of the money you earn on loan payments.
• If you cannot afford to pay your loans back at all, there are also two ways you can temporarily stop payments without penalties.
  • You can apply for deferment or forbearance, which temporarily stop payments or reduce the payment amount so you won’t fall behind.
  • You get approved based on your financial situation.
  • These options stop payments for a set number of months, so you don’t fall behind even though you’re not making payments.
• For some career paths, such as teaching, nursing, medicine, and serving in the military, you may be able to qualify for student loan forgiveness.
  • Forgiveness means that your student loan debt is erased completely without any penalties.
  • You must meet certain requirements, but then your debt is forgiven.
  • You can also qualify for loan forgiveness if you volunteer after college through organizations like PeaceCorps, AmeriCorps, or VISTA (Volunteers in Service to America).

Smart Money Tip: Educate yourself if you get student loans

If you need to take out student loans to attend college, make sure to educate yourself about your loans as much as possible. This is just an introduction to student loans.

If you get student loans, take time to understand:

• How your loans work—are they subsidized or unsubsidized?
• What repayment options will be best for you?
• Can you qualify for student loan forgiveness?

Even before you graduate, start planning how you will pay off your loans.

And if you only qualify for unsubsidized loans, find ways to keep the balance as low as possible. For example, you may want to work part-time or at least work during summer breaks to pay off the interest that will be building up while you attend school.