5 Things You Wish You Knew About Student Loans Before You Took Them Out

By Julia Dunn on November 28, 2017

For most students, loans are their only way to pay for college. It’s rare that students are awarded grants or scholarships to cover their entire set of expenses, including tuition, student fees, food and housing. This means students usually have to take out at least a small loan to make ends meet–but many students don’t know much about loans before they sign their first promissory note, simply because they have no choice but to take out a loan to pay for higher education. Here are 5 things you wish you knew about student loans before you took them out:

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1. They aren’t all created equally

Ever hear the terms “subsidized” and “unsubsidized” student loans? They’re important terms for college students. As explained by Drew.edu, “The Federal Government pays the interest for Direct Subsidized Loans while the student is in college or while the loan is in deferment. Interest begins accruing for Direct Unsubsidized Loans as soon as the loan is taken out.” Between the two, you’d want to have as many subsidized loans as possible rather than unsubsidized. There are also loans offered by private companies, which may come with an entirely different set of policies regarding repayment and interest.

2. The number of loans you have, and their balances, does affect your credit score

“Credit score” is another one of those adulting terms you’ll want to learn about. Many people say the best thing a college student can do for themselves at their age is to start working on their credit score. You can do this by applying for a credit card, hoping it will get approved, and working on paying off the card in full as you make small payments on it. This improves your credit score because it tells lenders that you are capable of repaying your debt. However, your loans are factored into your credit score to a degree. Credit Karma is a great online resource for students looking to learn more about credit, see their own credit score, and assess which factors are most profoundly impacting their credit.

3. They get bigger

Loans all have different interest rates. The lower the interest rate, the better, because if you have an unsubsidized loan, you’re going to have to pay off the interest that accrues on that loan while you’re in school. Pay attention to the interest rates on each of your loans–this may help you determine which loans will grow the fastest, allowing you to make an action plan for paying off your loans in the smartest order.

4. There are several types of repayment options available to you

After you graduate, you have 6 months before you have to start paying back your loans. This is called a “grace period.” After this point, you should consider what kind of repayment plan best suits your situation from the following options (information adapted from FinAid.org):

  • Standard Repayment: You will pay a fixed monthly amount for a loan term of up to 10 years. Depending on the amount of the loan, the loan term may be shorter than 10 years. There is a $50 minimum monthly payment.
  • Extended Repayment: Similar to the standard repayment plan, but allows a loan term of 12 to 30 years, depending on the total amount borrowed. “Stretching out the payments over a longer term reduces the size of each payment, but increases the total amount repaid over the lifetime of the loan.”
  • Graduated Repayment: A plan that starts off with lower payments, which gradually increase every two years. “The loan term is 12 to 30 years, depending on the total amount borrowed. The monthly payment can be no less than 50% and no more than 150% of the monthly payment under the standard repayment plan. The monthly payment must be at least the interest that accrues, and must also be at least $25.”
  • Income-Contingent Repayment: Also seen as “income driven repayment” plan. The amount you pay each month is based on the your income and your total amount of debt. These payments are adjusted annually your income changes. The loan term is up to 25 years, but after this time is up, any remaining balance on the loan will be discharged. “The write-off of the remaining balance at the end of 25 years is taxable under current law. There is a $5 minimum monthly payment.” Note that the Income Contingent Repayment is available only for Direct Loan borrowers.

Each type of plan has pros and cons, so it’s worth consulting with a staff member at your university’s financial aid office to discuss your options!

5. You’re not the only one

Sadly, most college students will graduate with debt. According to Pew Research Center, “four-in-ten adults under age 30 have student loan debt. Among adults ages 18 to 29, 37% say they have outstanding student loans for their own education. (This includes those with loans currently in deferment or forbearance, but excludes credit card debt and home and other loans taken out for education.) Looking only at young adults with a bachelor’s degree or more education, the share with outstanding student debt rises to 53%.” This is unfortunate, but it’s also sort of a good thing because it means you can talk to others about their loan-repayment strategies and share advice. The more educated you are about your loans, the faster you’ll get rid of them!

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