With the high costs of attending a four-year college or university, you may need to finance at least part of your education, and you won't be alone. At the end of 2023, outstanding federal student loan debt was at $1.6 trillion, according to the Federal Reserve Bank of New York.
It’s important to learn about student loans to get a handle on how complicated they can be. By understanding how this type of debt works, you’ll be able to save yourself from unpleasant surprises and pay less in student loan interest.
1. Student loans should be a last resort
Don’t turn to loans as your first option to pay for school. You could substantially reduce how much you need to borrow by making choices like these:
- Complete the FAFSA and submit as close to Oct. 1 as possible
- Complete your state’s financial aid application
- Complete the CSS Profile if you’re applying to any private schools that require it
- Apply for scholarships and grants
- Work after school and during the summer
- Choose a lower-cost school, at least for your first two years
2. Don’t borrow more than you can realistically repay
If you don’t know what career you want to pursue, you might end up in a lower-paying job when you graduate — something that requires a college degree but isn’t highly specialized. Borrowing more than you need to earn your degree doesn’t make sense in this situation.
If you’re set on a career path and plan to earn a more specialized degree from a school with a strong program in that area, you could justify borrowing more. For instance, taking out $60,000 in student loans to major in computer science, where you can anticipate earning six figures after graduation, makes more sense.
3. Prioritize federal loans over private
If you have to borrow for college, you should use federal loans first to cover as much of the cost as possible. To qualify for these loans, you must fill out the Free Application for Federal Student Aid (FAFSA) for each academic year.
Only after you’ve exhausted your federal loans should you consider private student loans. What’s more, you should prioritize subsidized federal student loans over unsubsidized ones. Subsidized loans are less expensive because the government pays the interest your loans accrue while you’re in school at least half-time.
Good to know: Federal loans offer benefits private loans don’t. Benefits include income-driven repayment plans, public service loan forgiveness, deferment and forbearance when you’re in school or struggling financially, and discharge if you die or become totally and permanently disabled before paying off your loans.
Learn More: Subsidized vs. Unsubsidized Student Loans: Know the Difference
4. Not all private lenders are created equal
If you must take out a private loan, it’s crucial that you shop around to find the best deal. Unlike federal student loans, which all come from the same source and have the same interest rate (depending on the loan type and disbursement date), private student loans are available from many lenders.
Some private student lenders have more generous policies than others. One might discharge the loan balance when the borrower dies, while another might hold the borrower’s cosigner or estate responsible for the balance.
Perhaps most important, you might qualify for a better interest rate with one lender than another. One lender’s best rate might be 5%, while another’s is 7.5%. Finding the cheapest rate is easy and free, and it could save you thousands of dollars.
The companies in the table below are Credible’s approved partner lenders.
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
5. Learn the details of loan costs and repayment
Many student loan borrowers don’t really understand how their loans accrue interest, and it ends up costing them.
For example: Let’s say your student loan accrues $200 in interest every month, but you only pay $100. Your lender will apply that $100 toward the interest you owe and add the remaining $100 to your principal.
None of your monthly payment will go toward your principal, and your balance will grow by $100. Next month, your loan balance will be even larger because interest will accrue on a greater amount of principal.
In other words, even though you’re making loan payments, you’re not making any progress toward paying off your loan. Instead, your loan amount is increasing and becoming harder to repay.
This is why periods of loan forbearance or deferment often aren’t the gift they appear to be. Your lender might allow you to skip monthly payments without adding late fees or reporting your account as delinquent to the credit bureaus. In the short term, this payment relief seems great, but in the long term, it can dig you into a deeper hole.
Federal student loans require you to complete student loan entrance counseling — and it’s a good idea to take this program seriously. What you learn could motivate you to pay off your loans as quickly as possible. For example, you might decide to pursue public service loan forgiveness or make more than the minimum monthly payment.
Below are a few key terms to be aware of:
Federal loans have 10-year terms unless you choose a different repayment option, which can extend the term to 20, 25, or 30 years. | |
6. Use loan funds for just the bare necessities
If your lender has given you more money than you need to pay for school, you don’t have to spend it all.
You can repay the excess as soon as you realize you don’t need it. That way, you won’t have to pay interest on it and you’ll graduate with less debt.
7. Get to know your loan servicer
Your student loan servicer is the company you’ll make your payments to. It may not be the entity that loaned you the money, but it will be responsible for issuing monthly statements, approving or rejecting requests for deferment or forbearance, and reporting how much you owe and whether you pay on time to the credit bureaus.
Make sure you know who your servicer is, how to make your payments, and when they’re due. Get familiar with their website and where to find your statements.
8. Make in-school payments if you can
Many students never consider making payments on their loans while they’re still in school. But if you wait until after graduation to make your first student loan payment, you’re missing a great opportunity to save money.
Let’s say you’ve borrowed $10,000 with a 6% interest rate and a 10-year term. Your monthly payment would be $111, $50 would be interest, while $61 would be principal. Let’s also say your loan is not subsidized — in other words, the government is not paying your interest while you’re in school.
By just making the $50 a month interest payment — which you could earn from a couple of hours of tutoring — you would prevent your loan balance from growing each month. After four years, you would have paid $2,880 in interest, but you’d still only owe $10,000 in principal.
If you paid the full $111 each month, you’d only owe $7,000 at graduation. But if you paid nothing for four years, you’d owe more than $12,700.
9. Don’t stop learning about student loans — until your debt is paid off
You don’t have to become a statistic, another graduate who can’t afford to buy a home or who still has student loan debt at retirement.
If you understand how the different types of student loans work, how interest accumulates, and how you can get out of debt faster, you could very well pay off your loans in 10 years or less and enter your early to mid-30s with a clean slate.
Check Out: The Complete List of Student Loan Forgiveness Programs
