Student Loan Practical Guide: Costs, interest rates and repayment options explained

This guide presents, in clear and straightforward language:

• How the main types of student loans work
• What companies and financial institutions offer this service
• What repayment options are available
• How to interpret interest rates and understand their impact on the total amount paid
• The step-by-step process for applying for a student loan—from estimating the cost to signing the contract

1. Understanding the cost: How much does education really cost?

Before applying for any loan, it’s essential to understand the full cost of education, commonly known as the Cost of Attendance (COA). This typically includes:

• Tuition and fees
• Room and board
• Books and supplies
• Transportation
• Health insurance and personal expenses

Generally speaking, you may find:

• Four-year public institutions: Annual tuition tends to be significantly lower for in-state students compared to out-of-state students.
• Private nonprofit institutions: Total yearly costs (including housing and meals) can easily reach tens of thousands of dollars.

The loan amount needed is based on the difference between the COA and already available resources (scholarships, grants, personal income, and family support). This remaining amount determines your borrowing need.

2. Main types of student loans

Student loans fall into two broad categories: federal loan programs and private loans offered by banks and specialized lenders.

2.1. Federal Loans

Federal loans are often the recommended first option due to their standardized rules and built-in borrower protections. Key types include:

• Direct Subsidized Loan (for undergraduates)
  For undergraduates with demonstrated financial need.
  Interest is covered by the government during at least half-time enrollment and certain grace periods.
• Direct Unsubsidized Loan (undergraduate and graduate)
  Available to all students regardless of financial need.
  Interest accrues from the time the loan is disbursed, even while the student is in school.
• Direct PLUS Loan (for parents and graduate students)
  • Parent PLUS: For parents of dependent undergraduate students.
  • Grad PLUS: For graduate or professional students.
    These loans are unsubsidized and come with additional fees.

Eligibility for these loans typically requires completing the FAFSA and enrollment in an eligible institution.

2.2. Private Loans

Private loans are used when federal aid isn’t enough or when the borrower isn’t eligible for federal programs.

Key features:

• Issued by banks, credit unions, or private financial companies
• Approval depends on credit history, income, and often a co-signer
• Interest rates may be fixed or variable
• Terms (minimum amounts, grace periods, co-signer requirements) vary by lender

3. Interest rates: Overview

3.1. Federal Loans

Federal student loan interest rates are set annually and remain fixed for the life of the loan. In recent years, typical rates include:

• Undergraduate loans (Direct Subsidized & Unsubsidized): Around 6% annually
• Graduate loans (Direct Unsubsidized): Around 8% annually
• PLUS Loans: Around 9% annually plus origination fees

Rates can vary year to year, but once your loan is disbursed, the rate is locked.

3.2. Private Loans

Private loan rates vary widely depending on:

• Borrower and co-signer credit history
• Debt-to-income ratio
• Chosen term and fixed vs. variable rate

Interest may range from as low as 3% annually for low-risk borrowers to over 15% in riskier profiles.

Always compare the APR (Annual Percentage Rate), which reflects both the nominal rate and additional fees, for a more accurate cost comparison.

4. Institutions and companies offering student loans

4.1. Federal Programs

Federal loans are often the best first option because they offer:

• Standardized rates
• Income-driven repayment plans
• Deferment and forbearance during hardship
• Potential loan forgiveness for public service or nonprofit work

Because of these protections, it’s usually advised to exhaust federal loan options before seeking private financing.

4.2. Private Lenders

Key private lenders include:

• Sallie Mae – Offers loans for undergrad, grad, and professional programs
• College Ave Student Loans – Known for flexible repayment terms and in-school payment options
• SoFi – Offers student loans and refinancing, often with no origination fees and geared toward borrowers with strong credit
• Earnest – Focuses on personalized loan terms and detailed borrower assessments
• Ascent – Provides loans with or without a co-signer, including options for undergrad and grad students
• Citizens Bank – Offers student loans and refinancing products
• Discover Student Loans – Covers undergraduate, graduate, and specific academic programs

Many comparison platforms now exist to help students view offers from multiple lenders in one place, enabling better decision-making.

5. Step-by-step: How to get a student loan

Step 1 – Estimate the Loan Amount

Start with your institution’s published COA and subtract:

• Scholarships and grants
• Family support
• Personal income and savings

The result is your estimated loan need.

Step 2 – Apply for Institutional and Federal Aid

• Check with your school’s financial aid office for required documents
• Complete the FAFSA to determine federal aid eligibility

Step 3 – Review Your Federal Loan Offer

• Separate subsidized from unsubsidized loan amounts
• Prioritize subsidized loans whenever possible
• Only borrow what you need to minimize future debt

Step 4 – Assess Private Loan Needs

• If federal aid doesn’t cover all costs, explore private lenders
• Request quotes with various terms, interest types, and repayment plans
• Consider a co-signer if it improves your loan terms

Step 5 – Compare Offers

• Focus on APR, not just nominal interest
• Check whether the rate is fixed or variable
• Evaluate total repayment period and impact on final cost
• Review repayment grace periods, in-school payment options, and fees

Step 6 – Finalize and Plan Repayment

• Read the contract carefully, including all interest and default terms
• Track:
  • Principal amount
  • Interest rate
  • Amortization schedule
  • First payment due date
• Include loan payments in your post-graduation financial planning

6. Repayment options

6.1. Federal Loans

Federal loans typically offer:

• Standard 10-year plan with fixed monthly payments
• Graduated plans, where payments start low and increase
• Extended plans with lower payments and longer terms (more total interest)
• Income-driven repayment (IDR) plans that adjust payments based on income and may include loan forgiveness after a certain period

Payments usually begin after a grace period following graduation.

6.2. Private Loans

Repayment terms vary but often include:

• Immediate repayment (principal + interest while in school)
• Interest-only payments during school
• Fixed low monthly payments while in school
• Full deferment until after graduation (often with more accrued interest)

Terms can range from a few years to over a decade, depending on the lender.

7. Best practices to avoid excessive student debt

• Keep total loan amounts close to or below your expected annual salary after graduation
• Prioritize federal loans—especially subsidized ones—over private loans
• Be cautious with variable interest rates for long-term loans
• Make extra payments when possible to reduce the principal and interest
• Consider refinancing at lower rates once your career is stable, but weigh potential loss of federal protections

Disclaimer: This guide is for informational purposes only and is not affiliated with any institution. The information provided does not replace financial or educational planning advice from qualified professionals.