Student Loans – Navigating the Borrowing Process

Student loans are a common and often necessary component of financing your college education. Understanding the different kinds of loans available and how they work can help you make sound financial choices.

Direct subsidized loans have low, entry-level payments and offer more borrowing limits than private loans. They do not accrue interest while you’re in school, during grace periods and deferments.

Interest Rates

The interest rate that’s charged on student loans is based on the cost of borrowing for banks and other financial institutions, along with the yield of Treasury securities. For new borrowers, the rates are fixed for the life of the loan. For federal subsidized loans, the government covers the interest that accrues during in-school and grace periods and during authorized deferments.

For other borrowers, monthly payments are applied first to late fees and collection charges, then to the interest that’s been charged since the last payment and finally to the principal balance of the loan. If a borrower can refinance to a lower rate, their monthly payment will decrease and their debt balance will decline faster.

In the case of income-based repayment plans, a borrower’s monthly payments are determined by their adjusted income and capped at 15% of their total income over 25 years. As the economy’s health improves, so can a borrower’s ability to make those payments.

Payment Options

When you graduate, your loans will come due and you will need to begin making payments. Your loan servicer will provide you with a variety of payment options.

Federal loans offer multiple repayment options for borrowers. Income-driven repayment plans calculate monthly payments based on your discretionary income and family size. These plans typically extend your repayment term but also lower your monthly payment amount. You will need to submit your income and family size annually to maintain eligibility for these plans.

Other payment options include deferment and forbearance. While these options temporarily pause or lower your loan payments, they do not stop accruing interest and will affect your credit. Borrowers that miss payments will receive collection notices and may experience financial hardship. If you fall behind on your payments, you can seek loan rehabilitation or loan consolidation. These options may give you access to new repayment plans and even loan forgiveness if eligible.

Repayment Periods

September: Loans begin to accrue interest again for many borrowers. In addition, if your student loan is in deferment, the grace period ends and your payment will start again (unless you opt for an administrative forbearance).

October: Many borrowers receive their first monthly bill with their new repayment plan terms. This includes the Revised Pay As You Earn Repayment Plan, which caps monthly payments at 10 percent of discretionary income and cap payments at less than what you would pay under standard repayment and extends the loan term to 20 or 25 years.

It also includes the Income-Based Repayment Plan and the Public Service Loan Forgiveness program, which forgives some loans after 20 or 25 years for borrowers in nonprofit jobs, in the military or serving in federal, state, tribal or local government. These programs are typically based on financial hardship and require that you apply. Refinancing your student loans may be an option if you’re not able to qualify for those programs.

Borrower Assistance

The amount of money a borrower must pay back depends on the type of loan, how much is borrowed and when interest starts to accumulate. It also depends on the repayment terms.

A student loan can come from either a federal or private lender. Federal loans are offered through the government, while private loans may be issued by banks, credit unions or state loan agencies. Federal subsidized and unsubsidized loans are based on financial need and the government pays the interest while a student is in school and for six months after graduation. Private loans do not have this benefit and start accruing interest immediately.

Many borrowers use income-driven repayment plans to make their payments more manageable and to qualify for loan forgiveness. However, current processes require borrowers to submit tax information to their servicers annually to recertify their eligibility for these plans. The FUTURE Act would allow borrowers to authorize their servicers to automatically pull tax data, eliminating this barrier and saving time for borrowers.

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