Taking on debt for the first time can be intimidating for undergraduate students. However, securing a student loan is often necessary to receive the education you need for a prosperous future career. The average cost of attendance for college in the U.S. is $35,331 per year, which most students can’t afford out of pocket.
Fortunately, if you’re preparing for a bachelor’s degree, graduate school program, or other private or public education, you have several options for funding your education. Familiarizing yourself with the available federal and private student loan options and various repayment terms and rates can help you secure the best financing for your education.
Types of Student Loans
All student loans are essentially lump sums provided by an authorized bank, credit unions, private student loan lenders, or the government to cover your cost of attendance. College costs typically include tuition fees, rent, books, and other college-related expenses.
Some loan programs offer a grace period before repayments are due, and most institutions set your repayment period to begin after graduation. Monthly payments include loan fees and interest that gradually accumulate over time.
There are two main categories of student loans: federal student aid and private student loan financing. Within both of these categories, there are several options. Depending on your financial situation, or the financial status of your parent or guardian, educational program, and chosen lender, your loan amounts and interest rates will vary.
Federal Student Loans
The U.S Department of Education may provide you with a federal student loan. A federal student loan is available to eligible federal student loan borrowers to cover the expenses of a college or university degree, community college course, trade education, or technical school. Since federal student loans are government-administered, federal loans often have low-interest rates and flexible repayment plans.
Students qualify for federal loans through a stringent application process. The Free Application for Federal Student Aid (FAFSA) application form involves a range of questions regarding:
- The student and parents’ income
- Employment status
- Credit history
- Financial history
- Additional family information.
Federal student loan programs are either direct subsidized or direct unsubsidized. Each type of loan has differing eligibility criteria.
Direct subsidized loan
With a direct subsidized loan, the government pays interest on the borrowed amount until the student must start student loan payments. Once the student completes their education, they have a six-month grace period before repayments begin.
The school determines subsidized loan eligibility based on the student’s FAFSA application. Students applying for direct subsidized loans must have financial needs.
The federal student loan interest rates for direct subsidized loans are determined annually. These rates remain fixed for the entire duration of the loan.
Direct unsubsidized loan
The government grants direct unsubsidized loans regardless of a student’s financial needs. However, the interest structure differs significantly from subsidized loans. The government does not pay any of the loan interest. As soon as the college or school receives funds, interest accumulates on the borrowed amount.
Students who apply for unsubsidized loans directly, without financial assistance from a parent or guardian, may be eligible for higher loan amounts. Other benefits of this type of student loan include:
- No minimum credit score in eligibility criteria
- Typically available with a low, fixed interest rate
- Flexible repayment terms
- No prepayment penalties
Despite the advantages of an unsubsidized direct loan, these undergraduate loans have some notable downsides. Compared to loans from private companies, the borrowing limits are quite low. There are also stricter criteria on how you can spend the loan money. To maintain eligibility, students must resubmit a new FAFSA form every year.
Direct PLUS loans
A parent or guardian takes out direct PLUS loans on behalf of the dependent student. They require a FAFSA student loan application plus a credit profile check. These loans are designed as funding for parents of college-attending children and don’t consider financial needs. Instead, they provide flexibility to the parents regarding active repayment options.
For example, the parent can apply to receive the total cost of college education in one lump sum, minus any financial aid package or scholarship. Direct PLUS loans come with low fixed interest rates, reducing the overall loan cost. They are also available with flexible repayment options and deferment options. The maximum deferment period is usually until after the student graduates.
Direct PLUS loans are also available to professional students and graduate students. Rather than having a parent pass a credit check, the student inherits the financial responsibility. Alternatively, the student can secure a creditworthy cosigner to apply.
These loans last for one year at a time. The parent, professional student, or cosigner must pass an annual credit check every academic year to be eligible for funding.
Private Student Loans
Private student loans are available from banks, credit unions, and other private lenders. Unlike federal credit, private loans are typically available at variable rates. Many private student loan lenders have strict repayment requirements. Some have aggregate loan limits, putting caps on the loan maximums you can receive in a year.
What affects private student loan interest rates?
Private student loan financing doesn’t consider the borrower’s financial needs. Instead, lenders determine your creditworthiness by examining your credit score and financial history. You may need a reliable student loan cosigner if you have bad credit, significant credit card debt, or shallow credit history.
The loan principal can also influence the interest rate. The greater amount you can afford upfront, the lower the rate you’re likely to receive from private lenders.
Using the FICO standard as a guideline, borrowers should strive for a score of 670 or higher when applying for a student loan. If you don’t have an existing credit history, look for a cosigner with an excellent score to qualify for the best variable rates.
However, it’s important to choose a trustworthy cosigner. Although you remain the primary borrower, the cosigner assumes responsibility for repayment if you cannot pay your student loan debt. A high applicant credit score generally receives a higher rate discount on private loans.
Current interest rates
The annual percentage rate (APR) for private student loans in 2022 typically ranges between 6% and 7%. These variable rates are significantly higher than the 4.12% average federal loan interest rate.
Fees and Interest
Unfortunately, all student loan repayment plans include fees and interest. Whether you secure a loan with fixed or variable interest rates, the interest on your loan accumulates each month and is included as part of your monthly student loan payments.
The loan interest rate isn’t the only relevant factor when choosing between lenders. You must consider the total cost of borrowing, which includes fees. Depending on the loan provider, the number of additional loan fees can vary. Most institutions, at a minimum, charge an application fee and annual disbursement fees.
Student Loan Repayment Options
Unlike personal loans, auto loans, and other forms of credit, student loan debt comes with several types of loan repayment options. Some institutions facilitate automatic payments, allowing borrowers to sync repayments with their bank accounts. Federal lenders offer income-driven repayment plans to help graduates pay back the loan cost.
Income-based repayment (IBR)
With an IBR, provided the borrower has sufficient income, they pay between 10% and 20% of their monthly income for 10 to 25 years until their balance has been paid off.
Standard repayments are typical for a fixed-rate private student loan. The borrower agrees on a fixed monthly repayment amount that lasts for around ten years or until the balance has been paid.
Graduated repayment plans start with low monthly payments and gradually increase over the course of the loan. This type of repayment plan is intended for graduates who begin their careers in low-income jobs but expect to increase their earnings significantly after several years.
Under these repayment plans, borrowers have a more extended period to pay off their loan balance than in a standard loan agreement. Monthly payments are typically lower than standard or graduated repayment plans and may last for up to 25 years.
Revised pay-as-you-earn (REPAYE) repayment
A REPAYE agreement is usually around 10% of your discretionary income each month and intends to help graduates with financial struggles continue making payments on their loans.
Student loan refinancing
You can explore student loan refinancing to help lower your private student loan interest rate. Opt for a minimum loan amount when refinancing that covers your original loan amount while reducing your monthly loan payments.
No matter what type of loan type you have, you can explore student loan consolidation. Loan consolidation can help you put all of your undergraduate or gradient student loans into a consolidated loan where you can make one low monthly payment.
Although missing a single student loan payment may not be very costly in the long term, falling behind on your loan can damage your credit score. The consequences are similar whether you borrow from the government, a private financial institution, or an online lender.
The loan servicers initially charge late fees, a specified percentage of your monthly payment. If missed payments continue, the lender may report your delinquency to the three major credit bureaus, lowering your credit score. Missed payments can remain on your credit score for up to seven years.
Consistently missing repayments eventually leads to loan default. Punishments for defaulting on a student loan include:
- Seizing your tax refund
- Garnishing your paychecks
- Removing social security benefits
- Revoking your professional licenses
- Suing to collect money owed
If you’re worried about student loan repayments, inquire about loan forgiveness programs. Federal loans can be canceled or discharged in certain circumstances. However, this type of discharge is typically reserved for public service employees or those with disabilities.
How to Get a Student Loan
At T&I Credit Union, we offer student loans through our partner company, Student Choice. You can begin the application process without being a member, but you must join T&I Credit Union to get funding. Read our full eligibility requirements for more details on the application process.
As a local credit union, we have your best interests in mind. We strive to offer competitive interest rates and low monthly payments based on the Prime index. Depending on your needs, we can provide variable and fixed interest loans. Our current average rates (May 2022) are between 5.25% and 6.75% APR.
T&I Credit Union provides loans up to $75,000. We offer flexible repayment options over 20 to 25-year terms. 97% of approved loan applicants have a cosigner. Applying with a parent, guardian, or creditworthy cosigner increases your chances of approval and helps you secure the best rates and terms.
Our four-step approach makes the student loan process as straightforward as possible. Simply fill out the online application and submit all relevant documentation for verification. Once you receive verification from your school, you can disperse the funds to your institution and begin your education.