How Do Student Loans Work?

55% of bachelor’s degree students from the class of 2020 took out a student loan. In 2022, there are 43.4 million unduplicated federal loan borrowers. That means if you've just graduated, there's a good chance that you have a student loan debt; now it’s time to start paying it back efficiently. It can seem intimidating to pay off hefty loans, and even more intimidating to see them grow in interest, but don’t panic – there are steps you can take to pay off your student loans and set up your future for financial success.

Where to Start

Set yourself up for success by organizing your loans. Ask yourself the following questions before you begin:

• How much money do I owe?
• Who do I owe money to?
• What’s the minimum monthly payment I owe on each loan?
• How much interest will I be charged for each loan?
• Are my loans federal or private?
• What do I want my budget to look like when paying back my student loans?

Note that federal loans are granted by the government and private loans are provided by banks, credit unions, and financial institutions. The key difference here is that federal student loans are usually more flexible – borrowers don’t need a credit check to be eligible and they are allowed to change their repayment plans even after they’ve taken out the loan.

Private loans are stricter in that you’ll likely need to have a good credit score and a cosigner, but they offer you the option of either a fixed or variable interest rate.

There are three different types of federal loans that you can take out:

1. Direct Subsidized Loans: While you’re in school, the U.S. Department of Education will pay the interest on your loan.

2. Direct Unsubsidized Loans: While you’re in school, you will have to pay the interest on your loan.

3. Direct PLUS Loans: These both have a fixed interest rate and are not subsidized.

• Grad PLUS Loans: These are for graduate or professional degree students.
• Parent PLUS Loans: These are for parents of dependent undergraduate students.

Visit www.studentaid.gov to learn more about which loans you are eligible for.

Student Loan Repayment Plans

Knowing the type of loan you owe is key when finding the best repayment plan that works for you. Not only does it depend on whether it’s a federal or private loan, but also what plans you’re eligible for, your personal financial goals, and how much you can afford.

How Long After Graduation Are Student Loans Due?

Once you graduate, student loan servicers typically will grant you a grace period; during this grace period, you will not be required to make any payments towards the loan you took out. If you’ve taken out a federal loan, you’ll likely have a 6-month grace period, where private lenders may vary in length.

Bear in mind that private and subsidized loans still charge interest during the grace period. It’s encouraged that you try your best to make payments on the interest during this time to cut costs once the grace period ends.

INTEREST FROM FEDERAL AGENCES HAVE BEEN SUSPENDED UNTIL 8/31/22 AND HAS BEEN EXTENDED TO LOANS IN THE FEDERAL FAMILY EDUCATION PROGRAM.

Even so, you should still aim to make payments during this time.

How Do I Pay Back Student Debt?

If you’re feeling overwhelmed by the amount that you owe in student loans, know that you’re not alone. In 2022, 43.4 million borrowers have federal student loan debt. Fortunately, there are strategies you can use to help you pay down your debt.

Debt Consolidation

Also referred to as student loan consolidation, this strategy allows you to merge various loans together so that you can pay one interest rate. The interest rate after these loans is combined will be the average rate from all loans. This will help cut down on how much you are ultimately paying in interest.

Refinancing

Basically, you are taking out a new loan to pay off your old loans. Over time, interest can build and build and become super expensive. By refinancing, your new loan starts at a lower interest rate, cutting down how much you will owe each month. This is a helpful option to paying off student loan debt, as long as you don’t extend the repayment period.

Be on the lookout for scams when considering debt consolidation or refinancing; unfortunately, some sites look authentic but will really try to steal your money. The last thing you need when paying off debt is to lose even more of your money.

How Can I Pay off My Student Loans Quickly?

The key to avoiding debt and saving money is to pay off your student loans quickly. Here are a few tips on how you can pay off your loans at a faster pace:

1. Pay Extra

If your budget allows it, try to pay extra each month towards your loans. It may not seem like it in the moment, but you will be saving money in the long-term. “Found money,” like a birthday gift, salary bonus, or money earned from a side job, are all helpful when trying to pay down debt quickly. You should also pay off one loan at a time with this method, starting with the loan with the highest interest rate. Note that you’ll save more money by making payments on the principal, or the money you initially borrowed, instead of on the interest. With more principal paid off, less interest will accumulate, which makes it easier for you to completely pay off a loan.                                                     

2. Bi-Weekly Payments

Paying twice a month instead of just once a month will add one extra loan payment each year. The upside to this method is that it won’t feel like it’s a huge difference in how much you’re paying, and you’re contributing more than you would. If you manually make the additional payment, you can even contribute a little but extra if your budget allows it.

3. Use Autopay

You can schedule your payments to be automatically taken from your checking account. Not only will this maintain a good credit score and let you opt for a refinancing plan if you choose to, but most lenders even offer interest rate savings if you sign up for autopay.

4. Employee Benefit

Some employers offer a benefit to help you pay off your student debt. Talk to your HR department to see what options are available – this could be a tremendous help to pay off your debt and start profiting for the future.

What Happens if You Cannot Pay Student Loans?

It pays to investigate what kind of student debt loan forgiveness programs may be available to you. For those who are pursing public service careers, Public Service Loan Forgiveness offers student debt relief as well. Teacher Loan Forgiveness is yet another example of loan forgiveness for eligible teachers.

If you find that your student loans are overpowering you, talk to your loan servicers to discuss how you can get back on the right track. You can also reach out to debt relief companies who can help negotiate a debt reduction or help you arrange lower payments with your servicer.

This is part of a bigger series that was designed to guide recent college graduates towards reaching their professional goals and benefiting from their studies. Check out our guide to post-graduate life to learn how to leverage your degree financially.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Personal Finance Saving Money