A Freshman’s Guide: Student Loan Basics

So, you’ve chosen your dream school but it’s too expensive to pay out of pocket. Even if you were fortunate enough to have received financial aid, scholarships, or grants, you still may need to fill the gap with loans. If you don’t know much about loans or how to apply for them, don’t worry – you’re not alone! Most American students are not required to take personal finance courses in high school. Furthermore, you probably were never in a position where you had to pay for something as costly as a college education. This can make things like loans, debt, monthly payments, and interest seem like mysteries. We’re going to walk you through a Freshman’s guide to student loan basics.  

Understanding Student Loans

In simple terms, a student loan is money that you borrow to pay for your education. In addition to tuition, this may cover living expenses, lodging, school fees, and textbooks. The goal is to provide you with what you need to pay for a great education. But, since you are borrowing the money, you will have to pay it all back eventually. This includes interest, which is essentially a fee you are charged to borrow the money in the first place. 

You can borrow this money from the federal government, or from a private company like a bank or credit union. Some people borrow money from both the government and from private lenders to get the total amount they need. Each institution has its own conditions and benefits that you should look into before making a choice. 

What Kind of Loan Should I Get? 

There are two main types of student loans: federal and private. The federal government, specifically the Department of Education, provides federal student loans. There are two main types of federal student loans that you can receive as an undergraduate student: Subsidized Direct Loan and Unsubsidized Direct Loan. There is also an option called the Parent PLUS Direct Loan, which can be helpful if your parent wants to help you pay for your education. Private student loans are loans you can get from private institutions like banks and credit unions. 

Four Basic Types of Loans 

Let’s explore the four types of loans in more detail: 

Subsidized Direct Loan (Federal) 

This loan is in the student’s name only. You do not need a credit check or cosigner to get this loan. This is especially beneficial to young adults who haven’t had time to build a credit history on their own. However, it’s limited based on a student’s financial need and is capped at $3,500 for both undergraduates and graduate students. 

The loan is subsidized because the government pays your interest on the loan while you are enrolled in college. You will have to start paying your own interest as well as part of the principal (amount you originally borrowed) as soon as you graduate or stop attending college full-time. This interest remains fixed, meaning it does not change throughout the lifetime of the loan, and lenders set it annually for the next academic year. A student’s award letter often includes the subsidized direct loan, the unsubsidized direct loan, and Parent Plus loans. However, unlike scholarships and grants, these loans require repayment, so carefully consider whether they are the best fit for your financial needs before accepting them. 

Unsubsidized Direct Loan (Federal) 

This loan is also in the student’s name only and guarantees credit approval without requiring a credit check or cosigner. However, they differ from subsidized loans in two key ways: 

1) They are available to all students, regardless of financial need. 

2) You owe interest on this loan right away as the interest is not “subsidized” by the government while you’re in school. You can defer payments on interest and principal while you’re in school and up to 6 months afterward, but interest is still accruing so you’ll have a higher payment to make when you finally start paying it back after graduation. Fortunately, the interest rate is the same as that of the unsubsidized loan. 

Parent Plus Direct Loan 

This loan is in the parent’s name, rather than the student’s. It’s relaxed credit check enables easy approval for many parents, unless they have major credit delinquencies. With the Parent Plus loan, your parent essentially takes out a loan for you and makes all of the payments. Some colleges will even auto-award this loan to families in need of additional funding, but it’s important to remember that other options are available. 

These loans have a higher interest rate than student direct loans and include an origination fee. This means a percentage of the borrowed amount is added to your balance upon receiving the loan. Consequently, your parent not only repays the borrowed sum but also pays an additional amount, PLUS INTEREST on that additional sum, throughout the life of the loan. 

Private Student Loan 

Private student loans, unlike subsidized and unsubsidized student loans, require a credit check. If you don’t have enough credit history on your own, you’ll need a cosigner who does have a good credit history. You and your cosigner will generally have to disclose information like current income, current debts, and other financial information to qualify for the loan. 

You can typically borrow more money from private lenders than you can from the government, and in some cases, the interest rate can be lower (it can also be higher based on your or your cosigner’s credit score. Usually, there is no origination fee like with a Parent Plus loan, and no prepayment penalty. However, some lenders require you to make in-school payments. It’s also important to note that unlike federal loans, private loans do not carry the same type of benefits like income-driven repayment plans so be sure to examine all of your options.  

Finally, keep in mind that different lenders provide different interest rates and terms. Before committing to a private student loan, research thoroughly to determine your qualifying rates and compare lender benefits. 

Calculating My Loan Repayment 

Once you decide exactly how much money you will need and what kind of loans you’re applying for, add the numbers up. Include interest for the unsubsidized loans, as well as any origination fees. Then, multiply the yearly loan amount by the number of years it’ll take you to complete your degree. 

This kind of calculation isn’t foolproof though. If you have a variable interest rate, your interest may change over time, causing you to pay more or less than you anticipated. You may also have to take out more loans for one year than another, due to unforeseen circumstances. Maybe you’ll study abroad or take a summer class. Maybe you won’t be able to work some semesters, due to the amount of schoolwork you have. Your tuition will likely increase every year, raising your costs. If you change your major or transfer schools, it may cause you to graduate later than you planned, which would increase the amount you need to borrow. These are all things to keep in mind when estimating how much you’ll owe. 

These steps only give a very broad estimate, but they can help when comparing financial aid options from different schools. Note that this will only give you a total that you’ll owe when you graduate. Your monthly payments will vary depending on the term, interest rate, and deferment taken for each individual loan. A good rule of thumb is that your total student debt should be less than your annual starting salary. Consider alternative financing options if you cannot cover the cost of higher education with your current plan. 

How do I Pay Back My Loans? 

Often, people view student loans as investments. Essentially, you pay to attend a good college in order to have better chances of employment. This could mean that you’ll make more money as a college graduate than you would have as a high school graduate. You will be making money that you didn’t have when you first applied to college. Ideally, this income will enable you to chip away at that investment through monthly payments. 

However, what if you don’t find a job in your chosen field or don’t make the money you need to repay your loans? Federal student loans have flexible repayment options that can help you through this time. Some federal programs allow you to pay back what you can based on your income, or to defer payments until you are in a more financially secure place. Be sure to check the terms of your loan to see what repayment options are available to you. 

Of course, you should get a head start and begin planning how you’re going to pay off your loans when you get them. You could pick up a part-time job, look into work-study at your school, or choose a lower cost school to reduce the amount you need for school. If you can make in-school payments, it can significantly reduce your interest and payments after you graduate. 

Just Remember- You Can Do This! 

A loan can vary in many ways, aside from the amount you borrow. It can be a private student loan or a federal student loan. It can have a high interest rate or a low interest rate. There can be a short repayment or longer repayment term. It’s all about finding the right loan for you, and hopefully, we’ve provided some helpful information. You don’t have to dread getting a little help paying for your education. Loans don’t have to be stressful – LendKey can make financing your dream quick, easy, and reasonably affordable. You can do it all online and get back to enjoying your summer.