If you’re thinking about taking out a student loan to help pay for college, you’re not alone. In fact, The Institute for College Access and Success has reported that nearly 70 percent of college students nationwide borrow money to help pay for school-related expenses. Student loans make it possible for many people to attend college and pursue their career goals, which can open doors to exciting opportunities for years to come.
Whether you’re a student or the parent of a student, you’ll want to understand exactly how student loans work, so you know how to shop for the student loan that’s right for you, make good decisions about how much you borrow, and so on.
If you’re just beginning to explore student loans, here are a few things to keep in mind:
Interest rates and loan origination fees
For many, a student loan is the first loan they take out, so you’ll need to know the basics of how loans work. One important part of any loan is the interest rate. This is essentially what it will cost you to take out the loan. Student loans are no different, and the interest rate will vary depending on the type of student loan that you take. Interest rates for federal student loans, for instance, are currently set once a year and are fixed for the life of the loan (in other words, the rate on the loan won’t change over time). Private student loan interest rates are typically higher than federal direct subsidized and unsubsidized student loans, will vary by the specific lender, and may include both fixed and variable rate options.
You’ll also want to be aware of loan origination fees, which are one-time fees that are charged when you initially take out a loan. The percentage will vary based on the type of student loan and specific lender. For federal student loans, the origination fee ranges from 1.068% to 4.276% of the amount you’re borrowing. Many private student loans don’t have origination fees, but that can vary by lender. When charged, an origination fee is usually added to the loan amount, so you typically pay the fee as part of the loan.
Different types of student loans
Students have two main options when it comes to student loans: federal student loans and private student loans.
Federal loan options include Direct Subsidized and Direct Unsubsidized Loans. Direct Subsidized Loans are available to undergraduate students whose families meet the financial need criteria, and it is the only federal student loan in which interest does not accrue while the student is enrolled in school at least half-time, or during the grace period following graduation (typically six months). Direct Unsubsidized Loans are not awarded based on financial need, and they are available to most undergraduates and graduate students. There are annual limits and lifetime limits for Direct Subsidized and Unsubsidized loans though, so students may not be able to cover the full cost of college with these federal loan options.
Once a student reaches the limit on Direct Subsidized and Unsubsidized Loans, Direct Grad PLUS and Parent PLUS Loans are available to most graduate students and parents of students. Direct PLUS Loans have higher interest rates and higher origination fees than Direct Unsubsidized and Subsidized Loans.
Private student loans (also known as alternative loans) all have different terms depending on the lender. Unlike federal student loans, private student loans typically require applicants to pass a credit and income review so the lender can verify that the borrower will be able to repay the loan. Since most students don’t have sufficient credit history or income to qualify on their own, private student loans are often cosigned by someone – like a parent – who can meet the criteria. Our credit pre-qualification tool allows borrowers or cosigners to find out if their credit qualifies for a loan and what interest rates to expect. A cosigner accepts equal responsibility to repay the loan if the student can’t, and the loan will appear on the credit bureau report of both the student and the cosigner.
According to a report published by TIME Magazine, the average student loan payment in the United States is $204 monthly. This amount will differ for each student based on the amount they borrow and the loan’s interest rate, and we offer a student loan repayment calculator that allows borrowers to calculate how much their loan will cost and what their monthly payments will be.
Repayment periods will vary based on the specific type of student loan that is taken out; federal student loans are typically designed to be paid off within 10 years, whereas private student loans may differ based on the lender’s terms. Students usually won’t have to begin making their federal student loan payments until six months after graduation (or if they drop below half-time), although they always have the option to begin making payments while still enrolled in school. Many private lenders also offer the option to delay payments until after school, and some, like College Ave Student Loans, offer other in-school repayment plans too. If you can begin making payments during school – even small ones – you’ll usually save money in the long run because you’ll pay less in interest charges.
Once it’s time to begin making monthly payments, borrowers typically have the option to enroll in automatic payments, which allows these payments to be debited from their bank account each month. This can be a convenient option since you’ll never have to worry about missing a payment. As a bonus, you’ll often get a reduction in your interest rate if you enroll in automatic payments through your lenders.
Speaking of interest: If you’re looking to cut down on interest costs, you can always make more than the minimum required payment. Even if you’re unable to pay off your loan in full before the repayment period is up, any little bit beyond the minimum payment can help, especially when you’re talking long-term. Just be sure to make sure your lender won’t charge you a penalty fee if you pay the loan off early; that type of fee is not common with student loans, but it’s always better to confirm.
If you ever have any questions about how a student loan works, always reach out for clarification before applying. Taking out a student loan is a big decision, and you’ll want to make sure you understand the terms and conditions you’re agreeing to. If you’re taking on a federal student loan and need more information, you can always reach out to your college’s financial aid office. If you’re shopping around for a private student loan and have additional questions, be sure to contact the lender.