Student Loans: The Ins and Outs

What is a Student Loan?

Loans provided by the government or private lenders to cover educational costs like: tuition and fees, housing, books, etc… Each loan has different terms of agreement and interest rates. Understanding the different types of loans and their interest rates are key to knowing what your financial forecast will look like while in school and beyond.

Types of Student Loans

Federal Loans

Stafford Loan is the Main federal loan for students which include:

  • Federal Direct Loan - Subsidized
    • A federal need-based loan in which the government pays the 6.8% interest rate as long as the student is enrolled on at least a half time basis
    • As of July 1, 2012 graduate students can longer received subsidized loans
  • Federal Direct - Unsubsidized
    • A loan not based on a student’s financial need in which one is charged the 6.8 % interest rate from the time the loan is disbursed until it is paid in full.

Federal Perkins Loan

  • A campus based loan awarded to undergraduate and graduate students with exceptional financial need. The school acts as a lender using funds provided by the federal government.
    • A fixed interest rate of 5% is deferred from the loan until nine months after the student graduates.

Federal Direct Parent PLUS Loans

  • This loan is awarded to the parents of the student who is attending college. The loan takes in the credit history of the parents into consideration.
    • Fixed interest rate of 7.9% is charged on the loan from the time it is disbursed until it is paid in full.

Federal Direct Grad PLUS Loans

  • Federal loans for graduate and professional students with good credit history.
    • Fixed interest rate of 7.9% is charged on the loan from the time it is disbursed until it is paid in full.
    • In order to receive this loan your school must have determined the maximum amount eligible for your unsubsidized loans

Private Loans

  • A loan awarded by lenders such as banks and private loan institutions like Sallie Mae
  • Each lender has their own interest rates and terms and a cosigner is often recommended

How to Accept a Loan

Once the Office of Student Financial Aid (OSFA) has put together the student’s financial aid package, you’ll get an email notification stating the award letter can be viewed online through the UI-Integrate Self-Service.

  • Log onto to the site and click on Financial Aid or Finances, followed by Award Letter. Here you will view cost of attendance, need calculation and the Award Summary.
  • Below the Award Summary, the offered loan(s) and grant(s) will be listed along with a drop down box of "Accept" or "Decline".
  • After CAREFULLY reviewing each loan, you submit which loan(s) to accept and which loan(s) to decline.
    • You can also reduce the amount of loans that you accept at this time.  After you have created your budget for the semester, it is important that you reduce the amount of loans that you take out to cover only your necessary expenses.  You can also do this after loans have been dispersed, but you will have to repay the reduced amount to the University.
  • At this time, you can request changes to their Financial Aid.
    • Examples of appropriate changes
      • I will only be attending Fall semester.
      • My parent was denied a PLUS Loan for this academic year, please award additional unsubsidized loan funds.

Interest - Pay Now or Later?

One of the most important concepts to understand about student loans (and investments, banking, etc.) is the power of compounding interest.  Making small interest payments while you’re in school can seriously reduce your overall debt after you’ve graduated.

Compounding interest is when any interest accrued on a loan is added to the outstanding principal (initial loan amount); this amount added to the principal begins to accrue interest immediately. In other words you’re paying interest on interest.

Here’s an example that demonstrates how much you can save by paying interest while still in school as opposed to waiting until graduation:

Example 1: You borrow a $6,000 Unsubsidized Stafford loan and you pay the interest every month for 4 years. (Monthly interest payment of $34/month)

Starting Balance

$6000

Accrued Interest

$0

Balance when repayment starts

$6000

Monthly Repayment

$69.05

Total Interest Paid on Loan:

$2285.69

Example 2: You borrow a $6,000 Unsubsidized Stafford loan and you defer the interest every month for 4 years.

Starting Balance

$6000

Accrued Interest

$1632

Balance when repayment starts

$7632

Monthly Repayment

$87.83

Total Interest Paid on Loan:

$2907.48

Student Loan Repayment

You can ease some of the stress of paying back your loans by picking a repayment plan that works for you and your financial situation. 

Standard Repayment

  • You’ll pay a fix amount each month until your loans are paid in full. The minimum monthly payment is $50 and you’ll have up to 10 years to repay your loans. This plan is good for someone who can handle larger monthly payments, which is good because you can repay your loans faster. 

Extended Repayment

  • This plan requires you to have more than $30,000 in Direct Loan debt and no outstanding balance on any loan. You’ll have 25 years to pay back your loans with 2 repayment options: the standard and graduated plans. The standard plan is fixed payments of the same amount each month whereas the graduated plan starts with lower payments and increase every two years.  This is good for someone who can only make small monthly payments; however the longer your loans are in repayment, the more interest you have to pay.

Graduated Repayment

  • This plan starts with lower payments that will increase every two years; a good option for someone who expects their income to increase steadily over time.  The repayment period is up to 10 years. 
  • Keep in mind that although your monthly payments will gradually increase, there will never be a payment that is 3x greater than any other payment.

Income-Based Repayment (IBR)

  • The monthly payments for this plan are based on your income.  If there is any period of financial hardship your payment will be adjusted annually. The maximum repayment period is 10 years, however if certain requirements are met over a certain length of time you may qualify for cancellation of the unpaid portion.

Income-Contingent Repayment (ICR)

  • This is a flexible plan that’s designed to avoid financial hardship. You will have up to 25 years to pay back these loans and if after this time your loans are still unpaid they can be discharged, granted you were consistently making payments. 
  • Each year, your monthly payments will be calculated off your adjust gross income (and your spouse’s if you’re married), family size and total amount of your loans. 
  • Your monthly payments will be based off either the amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor(varies per income) or 20% of your monthly discretionary income. This is your adjust gross income minus the poverty of your state for you family size, divided by 12.
  •  This plan is not eligible for PLUS loan borrowers.

**Quick tip: Sign up for the electronic debit account (EDA) when you receive your first bill.  Not only will you not have to worry about sending out a check every month but you’ll receive a 0.25% reduction in the interest rate on your loans during any period. 

Graduation Student Loan Checklist

After you graduate, you will need to complete exit loan counseling, both when graduating undergraduate and graduate studies.  To complete this necessary component of your loan repayment agreement, you will need to do the following:
  • Visit NSLDS to complete exit counseling
    • You can also find the servicer of your federal loan here if you are unsure.
  • Consider consolidation of your loans.
  • Find out when your first payment is due after the 6 month grace period.
  • Select the most appropriate repayment plan for your needs.
  • Make all your payments on time to PAY OFF YOUR LOAN!