Many students and parents rely on student loans to make college more attainable, but before borrowing money it’s essential to understand how student loans operate and their implications for your goals and plans for the future.
Federal Direct Subsidized Loans can be obtained based on financial need; private loans can be found from banks, credit unions, state loan agencies, or other sources.
Interest Rates
Interest rates are an integral component of loan costs. They will differ depending on your type of loan; federal loans usually offer lower rates than private ones and particularly need-based federal loans tend to offer reduced rates.
Federal student loan interest rates reset annually for loans disbursed between July 1 and June 30 of any school year, using the highest yield from a 10-year Treasury note auction plus a statutory add-on percentage. This system marks a dramatic departure from earlier methods when Congress would simply choose whatever rate seemed good on any particular day.
Private loans typically feature either fixed or variable interest rates, depending on various factors including your credit score, income (or that of any cosigners), loan amount and overall trends in the economy. Earnest is known to base its rates off an “reference rate” published regularly by a major national bank.
Repayment Periods
Based on your plan, loans typically take between 10-30 years to pay back. If financial hardship arises from COVID-19 or you lose your job, payments can temporarily be suspended; when they resume in October however, any unpaid balances will begin accruing interest.
If your income is anticipated to increase, consider selecting either the Graduated Repayment plan with low initial monthly payments that increase every two years; or an Income-Driven Repayment plan which caps payments at a percentage of discretionary income over 20 or 25 years.
Some borrowers use inheritances, bonuses from employers or tax refunds to accelerate debt reduction faster. This can save thousands in interest over the life of their loans but may compromise credit scores and future borrowing abilities; to protect yourself best it’s always advisable to repay student loans on schedule.
Deferment Options
Deferment and forbearance are options to temporarily suspend or reduce loan payments. Both options allow you to avoid interest payments; however, depending on the loan type chosen may require you to pay accrued interest later (known as “interest capitalization”). Each private student lender offers their own deferment programs with different rules as to when and how these apply; you should speak to your loan servicer to learn more about these programs.
Due to the Covid-19 pandemic, qualifying Federal loans may be deferred without payments and interest up to August 30, 2023 without incurring late fees or penalty. You can use this deferment opportunity with federal Direct, FFEL and Perkins loans; while in deferment interest may still accrue; therefore it’s advisable to switch after deferment ends to either income-driven repayment plans or loan refinancing in order to manage payments during periods of financial difficulty.
Specialized Loans
Dynarski is an active researcher with vast policy experience in higher education financing systems, so he understands the significance of employing effective collection methods to transform income-driven repayment plans and make them more user-friendly and simpler for borrowers rather than forcing them to choose among complex options.
As opposed to traditional loans with fixed payments, federal student loans often qualify for income-driven repayment plans that adjust monthly payments according to your income and family size. To be eligible for these plans, borrowers must recertify their income each year.
If a borrower’s income drops, they may qualify for a deferment of loan payments in certain situations, including educational activities that relate directly to professional or occupational goals. If you find yourself unable to meet your loan payments, contact your servicer immediately so you can discuss all available options – failing which the loan could become delinquent and possibly have adverse repercussions for both yourself and your credit score.
