Student Loans 101: How To Fund Your Higher Education

Birth. School. Work. Debt.

America’s enduring promise rests in self-betterment through education. Whole industries are built upon this idea, including the student loan industry. In fact, data from the US Federal Reserve shows record levels of self-betterment in 2020, with 42 million US student loan borrowers owing $1.67 TRILLION in collective debt. Empeople is here to help you get a handle on your share.

In 2020 there were around 19 million college students in America. Enrollment peaked at 21 million in 2010, or 6.5 percent of the US population, up from around 7 million in 1970. That’s a three-fold increase in raw student numbers and an 85 percent jump from the 3.5 percent of adults in America who went to college 50 years ago.

Meanwhile, the cost of college has jumped more than 3,000 percent since 1970. Average semester tuition at public university in 1970 was $405, while at private institutions averaged $1,792. In 2019, the most recent year statistics are available, average state tuition nationwide touched just above $10,000, and private colleges topped $35,000 for a single semester.

Despite these incredibly steep price increases, students continue to enroll, confident that this investment in self-improvement will pay off in the future. 

But before the investment can pay off, graduates will have to work to pay off their debt. 

FAFSA

The Free Application for Federal Student Aid is a general, catch-all form that seeks to discover a student’s eligibility for loans, grants, and other financial assistance in paying tuition at certified higher learning institutions. It is the first step for those who seek financial aid.

Interested applicants can find the link here, and the June 30, 2021 deadline is fast approaching. Once submitted, and depending on approval, the FAFSA data is turned over to the financial assistance office at your school, then determine how much you will need to borrow to attend. 

Federal student loans determined in part by the FAFSA and your university come in three flavors: 

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS Loans

Direct Subsidized Loans are available to undergraduate students with financial needs. Interest rates follow market changes, and the current interest rate is 2.75 percent, while the US Department of Education pays this interest as long as the borrower remains enrolled in school at least half-time. The grace period for payment ends six months after graduation and can be deferred longer under certain conditions.

Direct Unsubsidized Loans are available to undergraduates and graduates alike and do not carry a requirement to demonstrate financial need. Schools still determine how much you are eligible for and consider the cost of attendance and other financial aid. Borrowers pay all of the interest that accrues, and the current interest rate for undergraduates is the same 2.75 percent paid for Direct Subsidized Loans. However, graduate and professional students pay a higher rate at 4.30 percent.

Direct PLUS Loans are supplemental to other financial aid and are made directly by the US Department of Education to parents, graduate, and professional students through institutions that participate in the William D. Ford Direct Loan program.

All federal loans require the borrower to pay a percentage of the total loan amount as a fee. It’s important to remember that loan money can be used for education-related expenses only and that you will wind up owing more than the amount you borrowed. 

The Repayment Period

There are seven repayment options currently available to borrowers, and each option is different depending on loan repayment term, interest rate, and principal. You might have started out borrowing $35,000, but depending on three important variables, you will end up paying about $44,550 to clear your debt. 

• Standard Repayment Plans
• Graduated Repayment Plans
• Extended Repayment Plans
• Income-Based Repayment Plans
• Income-Contingent Repayment Plans
• Income-Sensitive Repayment Plans
• Forbearance
• Deferment
• Student Loan Forgiveness
• Default

Standard repayment plans are scheduled by the federal government or your lender to pay a fixed monthly amount for ten years and close the loan. Graduated repayments start with smaller payments at first and increase over time to meet the same ten-year deadline. 

Extended repayment plans are meant for borrowers who exceed $35,000 in debt. The repayment schedule can be fixed or graduated, but the term is stretched to 25 years. 

Income-based repayment plans are adjusted and recalculated annually to accommodate family size and finances. They are generally based on paying 10-15 percent of your income after taxes and personal expenses for ten years. Income-contingent repayment is based on paying 20 percent of your discretionary income for an expected term of 25 years. Income-sensitive repayment is based on your total income before taxes and expenses, with the term set at ten years.

But what happens when repayment is not an option, no matter the amount or term? For these contingencies when payment is put on hold there is either general or mandatory forbearance, but the interest continues to accumulate. Lending institutions get to determine the level of need under general forbearance but are required to provide relief when it is mandatory.

Deferment means you temporarily stop payments, and in certain situations are no longer obligated to pay loan interest. Wartime military service, the Peace Corps and unemployment can qualify for deferment or forbearance, but not everyone is eligible.

Student loan forgiveness exists, but only 1.3 percent of applicants qualified in 2020. Full-time public sector workers with ten years of perfect loan repayment history tend to qualify, as do 5-year teaching veterans in low-income schools. Still, this repayment option is exceedingly rare in the wild.

Default is what happens when payments stop and the borrower has failed to pay back the loan. Court action usually follows, and the results can be disastrous to current and future credit ratings for all co-signers. The lender has the right to demand immediate repayment in full.

Private Loans

You can apply for private student loans directly from a lender, and the loans are issued through various sources, such as banks, schools, credit unions or state agencies. Private loans are more expensive and have a higher interest rate than federal loans, and borrowers must start repayment before graduation. 

Private loan lenders determine the loan’s terms and conditions, and interest payments all get paid by the borrower.

Whether a loan is federal or private, all borrowers sign a promissory note, a legal document where the borrower agrees to repay the loan plus interest and includes all the loan terms and conditions. 

Neither a Borrower Nor a Lender Be

There are ways to avoid student debt, and the most obvious is to avoid higher education altogether. For many aspirational young Americans, this is a non-starter, and a college degree is seen by many as an indispensable component in a multifaceted, professional life.

Scholarships and grants are the most popular non-loan way to get free money to attend college. Scholarships for academic achievement, skills proficiency or heritage legacy are just three types. The commercial website Fastweb.com hosts a searchable database of money available to higher education students, and many include online applications.

Grants come as free money for higher education based on financial need, with no repayment after graduation. Studentaid.gov lists the Federal Grants available for FAFSA filers, including the PELL Grant, the Federal Supplemental Educational Opportunity Grant, Iraq and Afghanistan Service Grants and TEACH Grants. But beware, fail to graduate or leave without a degree and you could be liable to pay it back.

Another way to avoid student debt is to choose a school you can afford. There are 946 accredited community colleges in the United States, offering 2-year degrees, remedial education, and essential academic preparation for 4-year institutions. 

Community college tuition is free in several states to qualified individuals. Check the Community College Research Center to learn more and find a campus near you.

Finally, smart lifestyle choices are the rug that ties the room together in higher education. Living at home instead of the dorms or an off-campus apartment can save thousands of dollars. Using a bicycle for transport instead of an expensive automobile with its gas, parking, and insurance costs is another way to spend less in pursuit of a degree.  Any little bit helps!