Learning Outcomes
- Explore factors in borrowing and repaying student loan debt
Federal Student Loans
Federal student loans are offered through the U.S. Department of Education and are designed to give easy and inexpensive access to loans for school. You don’t have to make payments on the loans while you are in school, and the interest on the loans is tax deductible for most people. Direct Loans, also called Federal Stafford Loans, have a competitive fixed interest rate and don’t require a credit check or cosigner.
Direct Subsidized Loans
Direct Subsidized Loans are federal student loans on which the government pays the interest while you are in school. Direct Subsidized Loans are made based on financial need as calculated from the information you provide in your application. Qualifying students can get up to $3,500 in subsidized loans in their first year, $4,500 in their second year, and $5,500 in later years of their college education.
Direct Unsubsidized Loans
Direct Unsubsidized Loans are federal loans on which you are charged interest while you are in school. If you don’t make interest payments while in school, the interest will be added to the loan amount each year and will result in a larger student loan balance when you graduate. The amount you can borrow each year depends on numerous factors, with a maximum of $12,500 annually for undergraduates and $20,500 annually for professional or graduate students. There are also aggregate loan limits that put a maximum cap on the total amount you can borrow for student loans.
Direct PLUS Loans
Direct PLUS Loans are additional loans a parent, grandparent, or graduate student can take out to help pay for additional costs of college. PLUS loans require a credit check and have higher interest rates, but the interest is still tax deductible. The maximum PLUS loan you can receive is the remaining cost of attending the school.
Parents and other family members should be careful when taking out PLUS loans on behalf of a child. Whoever signs the loan is responsible for the loan forever, and the loan generally cannot be forgiven in bankruptcy. The government can also take Social Security benefits should the loan not be repaid.
Private Loans
Private loans are also available for students who need them from banks, credit unions, private investors, and even predatory lenders. But with all the other resources for paying for college, a private loan is generally unnecessary and unwise. Private loans will require a credit check and potentially a cosigner, they will likely have higher interest rates, and the interest is not tax deductible. As a general rule, you should be wary of private student loans or avoid them altogether.
Try It
student loans 101
Watch the video below to learn more about the different types of loans available to college students.
Using a Loan Calculator
Students need to remember that they are consumers when it comes to taking on loans for college. Not thinking about what the debt means after college only compounds the issues. It is important to think about how much you could afford to pay monthly on a student loan once you have completed college. It’s easy to do the math on loan costs. The Smart Student’s Guide to Financial Aid has a free loan calculator that will do the work for you. All you have to do is plug in the numbers. The loan calculator will also give you an estimate of what your annual salary will need to be to be able to repay the loan. Of course, the loan calculator will not know your other financial commitments, so be sure to look at the monthly payment and decide if you can afford that additional expense.
Repayment Strategies
Payments on student loans will begin shortly after you graduate. While many websites, financial gurus, and talking heads in the media will encourage you to pay off your student loans as quickly as possible, you should give careful consideration to your repayment options and how they may impact your financial plans. Quickly paying off your student loans or refinancing your student loans into a private loan may be the worst option available to you.
Payment Plans
The federal government has eight separate loan repayment programs, each with their own way of calculating the payment you owe. Five of the programs tie loan payments to your income, which can make it easier to afford your student loans when you are just starting off in your career. The programs are described briefly below, but you should seek the help of a licensed fiduciary financial adviser familiar with student loans when making decisions related to student loan payment plans.
The standard repayment plan, also called the graduated plan, sets a consistent monthly payment to pay off your loan within ten years (or up to thirty years for consolidated loans). You can also choose a graduated repayment plan, which will begin with lower payments and then increase the payment every two years. A third option is the extended repayment plan, which provides a fixed or graduated payment for up to twenty-five years. However, none of these programs are ideal for individuals planning to seek loan forgiveness options, which are discussed below.
Beyond the normal repayment options, the government offers five income-based repayment options: (1) the Pay As You Earn (PAYE) repayment plan, (2) the Revised Pay As You Earn (REPAYE) repayment plan, (3) the Income-Based Repayment (IBR) plan, (4) the Income-Contingent Repayment (ICR) plan, and (5) the Income-Sensitive Repayment (ISR) plan. Each program has its own method of calculating payments, along with specific requirements for eligibility and rules for staying eligible in the program. Many income-based repayment plans are also eligible for loan forgiveness after a set period of time, assuming you follow all the rules and remain eligible.
federal student aid loan simulator
You can try out the Federal Student Aid Loan Simulator to see how you can lower your payment, pay off your loans faster, decide whether to consolidate your debt, and explore options for if you’re struggling with your payments or considering borrowing more in student loans.
Loan Forgiveness Programs
Many income-based repayment options also have a loan forgiveness feature built into the repayment plan. If you make 100 percent of your payments on time and follow all the other plan rules, any remaining loan balance at the end of the plan repayment term (typically twenty to thirty years) will be forgiven. This means you will not have to pay the remainder on your student loans.
This loan forgiveness, however, comes with a catch: taxes. Any forgiven balance will be counted and taxed as income during that year. So if you have a $100,000 loan forgiven, you could be looking at an additional $20,000 tax bill that year (assuming you were in the twenty percent marginal tax rate).
Another option is the Public Service Loan Forgiveness (PSLF) program for students who go on to work for a nonprofit or government organization. If eligible, you can have your loans forgiven after working for ten years in a qualifying public service job and making 120 on-time payments on your loans. A major advantage of PSLF is that the loan forgiveness may not be taxed as income in the year the loan is forgiven.
Consider Professional Advice
The complexity of the payment and forgiveness programs makes it difficult for nonexperts to choose the best strategy to minimize costs. Additionally, the strict rules and potential tax implications create a minefield of potential financial problems. In 2017, the first year graduates were eligible for the PSLF program, ninety-nine percent of applicants were denied due to misunderstanding the programs or having broken one of the many requirements for eligibility.[1]
How U.S. Student Loans Became a $1.6 Crisis
Watch this video to learn more about the student loan crisis.
Your Rights as a Loan Recipient
As a recipient of a federal student loan, you have the same rights and protections as you would for any other loan, including the right to know the terms and conditions for any loan before signing the paperwork. You also have the right to know information on your credit report and to dispute any loan or information on your credit file.
If you end up in collections, you also have several rights, even though you have missed loan payments. Debt collectors can only call you between 8:00 a.m. and 9:00 p.m. They also cannot harass you, threaten you, or call you at work once you’ve told them to stop. The United States doesn’t have debtors’ prisons, so anyone threatening you with arrest or jail time is automatically breaking the law.
Federal student loans also come with many other rights, including the right to put your loan in deferment or forbearance (pushing pause on making payments) under qualifying circumstances. Deferment or forbearance can be granted if you lose your job, go back to school, or have an economic hardship. If you have a life event that makes it difficult to make your payments, immediately contact the student loan servicing company on your loan statements to see if you can pause your student loan payments.
The Consumer Financial Protection Bureau (CFPB) has created a series of sample letters you can use to respond to a debt collector. You can also file a complaint with the CFPB if you believe your rights have been violated.
student story: what i wish i’d known about student loans
This student story was written as part of Lumen’s College Success Student Contributors project. The story student stories are written in collaboration with real college students and college graduates to reflect real student experiences.
I went to three colleges and at no point did anybody say to me, “Hey, this is how you fill out a FAFSA.”
Even though I came from a family of educators, my family was doubtful I would make it to go to college because I didn’t take high school seriously. I had no concept of what it was going to cost to go to school, and my family couldn’t pay for both me and my sister, who were two years apart, to go to school. My parents submitted a FAFSA for me when I applied to school, and through a combination of loans and grants, and some help from other family members, I was able to start working on my degree in creative writing.
I became friends with the financial aid officer at my school and she would talk with me whenever I had any issues or questions about my aid. Then my parents got divorced when I was in school. She told me “Your parents submitted their divorce papers, I need to know who your custodial parent is because that will determine your financial aid.” At first I chose my father and step-mother because I was closer with them, but the aid officer told me that they made too much money for me to receive my aid package, so I decided to go with my mother instead.
I dropped out of school. I went back for a time, and then I dropped out again. Then, about two months after my ex-girlfriend and I broke up, I received an acceptance letter and financial aid letter in the mail for a school that told me they would take all my previous credits, and get me graduated in a year. My ex-girlfriend had submitted my application and FAFSA on my behalf.
I had already taken out $6,000 in loans and I was going to have to take out $14,000 more to graduate. That year, my bank told me that they wanted to consolidate everything for me. They were going to house my student loans, have me move my checking account over to them, and they gave me $5,000 in credit to use. At the beginning of the semester, money would appear in my account, and I would use it to cover pretty much any of my expenses, groceries, meals out, anything I wanted; I spent it. I ended up graduating with $21,000 in student loans and had amassed a large amount of credit card debt.
I work in the financial sector now and I now know things about debt I wish I would have known as a student. Six months after I graduated college, my student loans became due. While I had a job that could handle payments, I wasn’t aware of what was coming. I was gainfully employed for three years before the financial crisis of 2008. Suddenly I couldn’t pay, and my debt just kept growing and growing.
At the time, a lot of people were being told that forbearance was the best option for when you couldn’t pay. But what they didn’t tell you was that when you choose forbearance, it rolls over the debts of those missed payments towards the balance. For example, if you have three months where you were supposed to pay $150 a month, and you put your loan into forbearance, that $450 gets rolled into the total due. I was told that forbearance was my best option, and because of that my debt grew from 21k to 26k during that time.
What I wish people knew about student loans is that they are unlike other debt. They are unsecured lines of credit, which means that if you can’t pay it back, there’s nothing for an institution to take back, so there can be very serious consequences for the forbearance. With a term loan like a loan for a car, you might take out $15,000 and pay six-and-a-half percent interest and you know you’ll be paying it back over five years or so. You get a schedule for a period of time and that’s the term loan. But student loans are different. Do your research and if you can’t make your student loan payment, ask your lender about suspension, not forbearance.
glossary
private loans: distinct from federal loans, these are offered by private lending institutions and are best avoided, as they typically have higher interest rates and few of the protections and repayment options available to federal loan borrowers
subsidized loans: student loans that do not accrue interest during the student’s enrollment
unsubsidized loans: student loans that accrue interest during a students’s enrollment, an arrangement that can add significantly to the overall debt
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- Friedman, Zack. "99% Of Borrowers Rejected Again for Student Loan Forgiveness." Forbes, 1 May 2019, www.forbes.com/sites/zackfriedman/2019/05/01/99-of-borrowers-rejected-again-for-student-loan-forgiveness/. ↵
