University students in the United States borrow approximately $32,637 to attain a bachelor’s degree. However, the average federal student debt balance is $37,088. Including private student loans, the total average may be as high as $39,981.
Because of the ballooning balance, many believe that taking out student loans is a financial risk.
A 2022 survey with 4,420 respondents found that 36 percent of adults aged 18 years and above perceive student loans as a financial risk rather than a long-term investment.
Many borrowers may also struggle with student debts until retirement. If you plan on taking out a student loan, this guide will provide a roadmap to help you understand your options and manage your repayments efficiently.
Understanding the Types of Student Loans
When taking out a student loan, you borrow a lump sum from the federal government, a private lender, or the state government. These lenders will review your cost of attendance (COA), which involves textbooks, tuition, university fees, student housing, and other education-related expenses.
After finalizing the terms and conditions, you’ll receive the funds. In most agreements, you won’t repay the debts until after graduation. This flexibility lets you focus on your studies instead of worrying about repayment.
The types of student loans you can apply for include:
Federal Direct
Federal Direct student aid is a government-backed program with subsidized and unsubsidized options.
Subsidized
The direct subsidized option is available for undergraduate students with monetary setbacks. It is covered by the U.S. Department of Education (ED).
Your university will assess your COA to determine the amount you’ll receive. These funds won’t exceed your financial requirements.
The ED covers the interest based on the following conditions:
The borrowers at least attended the university half-time
The borrowers have a grace period of six months after graduating
When the borrowers postpone the repayments (deferment)
Unsubsidized
The direct unsubsidized option is available for graduate and undergraduate students. In this loan, you are not required to present evidence of monetary needs.
Your COA determines the amount you’ll receive from the university. However, you’ll pay for the interest throughout the loan period.
Direct PLUS
Direct PLUS programs are for graduate students (Grad PLUS) and parents of dependent undergraduates (Parent PLUS).
Your parents can use this federal student loan to pay college tuition. Meanwhile, you can use it to fund your career school if you’re a graduate student.
The ED will perform credit checks, so your credit score must meet the set threshold. However, even with a poor score, you can still be eligible if you meet specific requirements.
The maximum amount of funds you’ll receive is based on your COA. It excludes the other monetary aid you received.
Private
Banks, credit unions, and other private lenders provide non-federal student loans.
These loans are often best used to fill the gap in college expenses after maxing out your federal aid. Or, if the amount you receive from federal aid is insufficient, you can consider a private student loan.
Interest rates on private student loans primarily depend on your credit history. But you can have a co-signer with a good credit score. This co-signer can be your parent or guardian, which may help you receive favorable terms.
However, your co-signers will be financially accountable if you cannot make repayments.
Because the U.S. government doesn’t cover these loans, they typically don’t have flexible repayment options and borrower protection.
Health Professions
Federal student aid for health-related degrees is called Health Professions Student Loans or HPSL. You can qualify for this program if you’re enrolled in one of these degrees:
Dentistry
Optometry
Pharmacy
Podiatric Medicine
Veterinary Medicine
Universities offering these degrees are also eligible for HPSL.
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Tips for Managing and Repaying Student Loans
To avoid struggling with student debts, follow these tips:
Identify your financial goals
Before you apply for a student loan, you must identify your financial goals. Use the following questions as your guide:
How much of your money is going in and out?
Do you have fixed expenses?
What do you do for enjoyment?
How do you want to manage your student loans and other debts after graduation?
Where do you want to be in five or ten years?
Remember that you don’t need to feel pressured to know how to tackle money or get the perfect job immediately.
Calculate the total amount and understand the terms
Most students graduate with federal and private loans combined. To calculate the total amount and understand the terms, here are the considerations:
Thoroughly review your Student Aid Report
You’ll receive your Student Aid Report (SAR) after submitting the FAFSA form for federal loans. It may take up to three weeks to arrive.
Once you receive the document, thoroughly review it. Understand the offers and determine whether to take a private loan to cover the remaining costs.
Determine whether to get a private student loan.
For private student loans, shop around for offers and interest rates. Other terms to consider include:
Discounts
Repayment conditions
Co-signer release
Perks, e.g., principal balance reduction for on-time graduation
Knowing these terms will help you devise a repayment plan and avoid extra fees and penalties.
Plan accordingly using the grace periods.
Grace periods are the time frame you have after graduation before you’re required to make repayments.
Because each loan has different grace periods, you must thoroughly review them to plan accordingly.
For example, direct subsidized loans have a six-month grace period. Perkins Loans, a direct subsidized loan type, allows you one initial grace period of nine months.
Although grace periods for private lenders vary, most offer six months.
Outline a dept repayment budget and create a savings buffer
List the following expenses under your debt repayment budget:
Housing
Utilities
Groceries
Smartphone pla
Cable and internet
Emergency fund
Medical expenses
Memberships and subscriptions
Then, determine areas where you can cut back. For example, you can eat out less or cancel unused subscriptions.
If emergency funds are unattainable, create a savings buffer. This amount is a safety net for small, unforeseen expenses. With this cushion, you can cover minor costs without dipping into your budget.
Try to pay the monthly minimum.
Minimum payments are the cheapest monthly amount you can repay. You can avoid late charges and penalties by ensuring these on-time payments are made.
When your income increases or becomes more stable, you can gradually pay more than the minimum. The goal is to pay a little more each month when possible.
Explore the available repayment plans.
Federal loans have various repayment plans, including extended, graduated, Pay-as-you-earn (PAYE), direct consolidation, and income-driven repayment (IDR).
Contact your loan servicer to choose the repayment plan that best fits your budget.
For private loans, inquire about the options your lender offers. If requesting relief, you may need to present evidence of financial hardships. This proof can help you stay out of default.
One repayment option for private student loans is refinancing. This repayment approach can provide more flexible terms and lower monthly payments.
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Invest in Your Education Wisely
Student loans greatly vary. These investments require attention to detail and careful consideration.
Remember that your choices today can significantly influence your debt management after graduation. You must actively educate yourself and seek guidance to make wise decisions that benefit your education and long-term financial security.
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