Making Sense of Student Loans

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Student loans are quite possibly the bane of every college graduate's existence (at least the unlucky majority who has to take out student loans).  Yes I know, we borrowed the money and now we have to pay it back; that doesn't make it a more pleasant experience!  Around this time of year college seniors all over the country are graduating, and for those not continuing onto graduate school, the reality of student loan repayment has probably become a bit too real, and most likely overwhelming.

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Where do you start?  What does it all mean?  What do you do now?

Other than the pain you'll feel in your wallet every month for the next couple (or more) years, the real problem most new graduates seem to have is understanding these loans and what happens now.  I am no financial expert, but over the past year of repayment I have conquered the student loan confusion (or at least fought through it and am still alive).  I apologize in advance that this post may not be too interesting, but I hope at the very least it is helpful and informative.


The first step to understanding student loans, is to understand some of the most important terms.

Key Loan Terms:

Entrance/Exit Counseling-Required sessions for the borrower before they receive their first loan and once they leave school; counseling on loan knowledge and repayment.

Interest Rate-Fee that is charged by wherever/whoever you borrowed the money from.  Can be fixed (percent doesn't change) or variable (rate can change periodically).
Grace Period-The period between when you leave school and have to start making loan payments.
Principal-The amount you actually borrowed, once you start repaying means what you have left of this original amount still owed.
Subsidized-Loan where the government pays the interest rate while you are in school and during the grace period or any deferments.
Unsubsidized-Loan where the student is responsible for paying the interest at all times, even in school or deferment.
Federal Loans-Loans offered and regulated by the government (Stafford loans are federal loans)
Private Loans-A loan that is made by a private lender (banks, etc.) based on credit score
Consolidation-When the borrower can combine multiple loans into one loan with a fixed, but often higher, interest rate (often available for federal loans).
Forbearance-When you temporarily suspend or reduce repayment of student loans, regardless of your loan type your interest will accrue (add up).
Deferment-When you temporarily suspend repayment of student loans (interest doesn't accrue if you have Subsidized federal loans), you must meet certain qualifications.
Capitalization-When the interest you have accrued adds to the principal balance and increases what you owe.

Now wasn't that fun?!

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Seriously though, get used to many of those terms because you'll be looking at some of them for, most likely, the next few years.

The first thing that happens when you will be leaving school is you'll complete exit counseling on your loans (you may have recently had to do this).  Usually it's online and you have to read a lot of information and answer the questions correctly to complete it successfully.  Once your exit counseling is done, I highly suggest you look over your loans and lender websites.  Familiarize yourself with these sites and where and how you can access your loan information.  Find out important information like:

• When your grace period ends (when you'll have to start making payments)
• What types of loans (private, federal, subsidized, unsubsidized) you have  
• Your interest rates for your loans
• What payment options/programs are offered by your lender
• The total amount you borrowed

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Once you know this, you can estimate the monthly payment amount you would have to pay.  The website for my loans had some helpful information and your lender may even have sent paperwork estimating how much your payments could be.  Lenders, at least the ones for my federal loans, usually estimate these payments based on paying them off within ten years and how much you have borrowed.

For me, I knew I had all Federal Subsidized loans and that their grace period ended in November.  I was able to estimate pretty accurately what my monthly payment amount would be and was able to plan my budget accordingly.

With this estimated payment amount you can start to figure out whether you you can afford the expected payments.  If you looked at your savings/income and can, then that's great and you should start preparing for how you want to make those payments.  If you cannot or think you will not be able to, look at what payment plan options are offered by your loan provider.

• Most lenders offer payment plans where you can reduce your monthly payments by extending your period of repayment, this option is often based on your income.  
• My lender has a graduated payment plan where the monthly payments start lower and over time they increase (assuming over the years you will have a higher income and can pay more).  
• For some there are also the options of forbearance and deferment.  As explained above, both are ways to postpone payments.  If you think they are an option for you, make sure to get in touch with your lender to see how you can qualify/apply.  
• Depending on if you use one of these options you may have to deal with the capitalization on your loan (the interest that has added up while you haven't been paying).

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If you can make the monthly payments, then think about how would you like to make your payments.  Generally you either can pay via paper (you get mailed the bill), pay online, or you get the money drafted directly from your bank account.  I chose to have the money drafted so I wouldn't forget to make a payment and also my lender offers .25% off the interest rate of any loans I have drafted directly from my bank account.  The convenience and incentive of a lower interest rate made drafting the best decision for me.

In addition, you don't have to wait until your grace period is over to make payments, you can make payments whenever you can afford to.  For a subsidized loan if you make payment before your grace period ends then you are paying down your principal which means you will have less money for interest to build on.  I paid what I could afford to help lower my principal, especially for my loans with higher interest rates.

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Extra Advice Tidbits

If you have multiple loans with multiple interest rates you may also want to look at consolidation.  This will combine all of your loans (you cannot combine federal and private though, you can consolidate only the same type of loan) so you pay one amount monthly.  Often this may make your interest rate higher, but it will be fixed and the rate will depend on the amount you owe.

Loan Forgiveness is another option that is offered by many federal or need-based loans.  My different federal /need-based loans offer loan forgiveness for teaching, public service, disability, nursing, etc.  You have to meet certain criteria to be considered eligible and depending on the criteria you meet you can have up to a certain amount of your debt 'forgiven' (paid off).  Look into what programs your lenders offer to see if you can qualify for loan forgiveness.

Final Thoughts

It's important to look over all of this throughout the next couple of months because your grace period will be up before you know it!  The best thing you can do is to educate yourself and be prepared for the inevitable.  It can seem daunting when the payments actually start being due, and sometimes it feels like you'll be paying them off forever.

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But remember to relax, take a deep breath, and know that there are plenty of options out there if you ever need help making payments.  Know these options, and know that it's okay to ask your lender for any help or clarification.  Student loans are part of the lives for most college graduates and if you take the time to understand them first then the whole process will be a bit less stressful.  You can do this, you can survive life after college, and you will pay all your loans off one day!

Do you have student loan debt too?  What advice do you have for anyone dealing with student loans?