Paying for college can get costly. It costs almost $10,000 a year to attend a public, four-year university for in-state students. It’s more than double that for out-of-state students and triple for private schools.
There are a few different ways to pay for school, including grants, scholarships, help from family and student loans. But before diving in, it’s important to understand how student loans work.
In this post:
- What are student loans?
- How student loans are funded
- How to apply for student loans
- How does student loan repayment work?
- The right way to deal with student loans
What are student loans?
Student loans are loans you take out to pay for college and then pay it back, with interest, usually after you graduate.
For federal student loans, you’ll know how much you qualify for in loans when you get your financial aid award letter. Private student loans, however, come from private institutions, like banks, credit unions, or online lenders.
How student loans are funded
The way you get your money from student loans depends on the type of student loan you’re receiving.
If you apply for federal loans, the amount you receive comes from your dependency status and what year of school you’re in:
- First-year undergraduates: $5,500 to $9,500
- Second-year undergraduates: $6,500 to $10,500
- Third-year and beyond undergraduates: $7,500 to $12,500
- Graduate or professional students: $20,500
You’re also limited in how much you can borrow over the course of your college career. For dependent students, you can borrow up to $31,000 in student loans, and only $23,000 can be subsidized loans.
Private student loan limits vary by the lender you choose. Citizens Bank, for example, allows a maximum of $150,000 for undergraduates.
How to apply for student loans
To apply for federal loans, you’ll want to complete the Free Application for Federal Student Aid (FAFSA) first. Applying for student loans can be lengthy but once you understand what you need to complete the application, it’s a bit easier.
If you’re planning on taking out private student loans, you’ll need to apply with an individual lender, like a bank or online institution. You don’t need to fill out the FAFSA.
How does student loan repayment work?
When you graduate with federal student loans, you’ll be on a standard repayment plan of 10 years. But if your income is lower than expected, you lose your job, or you can’t find work after you graduate, here are some of your other options.
Income-driven repayment plans
The Department of Education offers a few different income-driven repayment (IDR) plans. These allow you to pay back your loans based on what you can afford, usually 10% to 20% of your discretionary income. They include:
- Income-based repayment (IBR)
- Income-contingent repayment (ICR)
- Pay as you earn (PAYE)
- Revised pay as you earn (REPAYE)
While IDR plans are a great help if you find yourself short of funds to make monthly payments, they can drag out your repayment period. Under IDR plans, you can expect to pay your loans for 20 to 25 years.
Consolidation and refinancing
If you have many different loans — even multiple federal student loans — you can combine them into one loan and make one monthly payment a month. While similar, consolidation and refinancing are not the same.
- Consolidation: This is when you combine all your federal student loans into one payment. The interest rate is the weighted average of all your loans, rounded up to the nearest one-eighth percent. Only federal loans are available for a Direct Consolidation Loan.
- Refinancing: All your loans — federal and private — are paid off and you start paying a new loan in its place. If you have any federal benefits, like lower interest rates, you’ll lose that once you refinance. Refinancing happens through private lenders, not through the Department of Education.
Forbearance and deferment
Deferment and forbearance allow you to temporarily stop making payments on your student loans without facing a penalty. The main difference in both is what you’re responsible for in interest payment during that time. Under forbearance, you’re responsible for the added interest no matter which loans you have.
Under deferment, you’re responsible for the accrued interest on select loans, including Direct Unsubsidized Loans, Direct PLUS Loans, and if you have a Direct Consolidation Loan, you’re responsible for the unsubsidized part of it.
Paying back your student loans can have a big impact on your finances. While you’re set to make payments every month until your loans are paid off, you can take advantage of some federal incentives while you’re at it.
The student loan interest deduction allows you to deduct $2,500 or the amount of total interest you paid during the year, whichever is less. Most student loan lenders, whether private or federal, will send you a Form 1098-E that details how much interest you paid that year. You’ll use those figures to complete your tax deduction information.
There are some limitations on the interest deduction, like how you file and what you earn. So before claiming this deduction, make sure you qualify first.
The right way to deal with student loans
Student loans aren’t the only way to pay for school, but for some, they might be vital to getting an education. From taking out student loans to repaying them, take the time to learn the right ways to handle your student loans. Here are a few tips:
- Take out only what you need: Borrow only as much as you need to pay for school. If you’ve had some financial help with school, you can request less than what you were approved for.
- Figure out a plan: After graduation, make sure you’re aware of when your payments are due every month. If need be, consolidate your loans or get on a repayment plan that’s best for you.
- Never miss a payment: Whether you set up autopay or set a calendar reminder, don’t fall behind on payments. Even one late payment can cause your credit score to drop.
- Pay extra when possible: If you’ve gotten a raise, bonus, or restructured your budget, put that extra money towards your loans. The sooner you pay them off, the less you’ll end up paying in interest over the life of the loan.
- Ask for help if you need it: If you’ve lost your job or don’t think you can make payments, contact your loan servicer to see what options are available to do.