Student Loans: Preparing for the College Conversation

Getting to know the student loan process

During the last few years of high school, the topic of student loans is sure to come up at the dinner table. Get ready for holiday meals where questions like "How do student loans work?" and "What is a student loan?" float around as you pass the potatoes to Grandma.

There’s a good reason for this. Student loans are an important consideration when you're thinking about how to pay for college. The amount of student loan debt in America hit $1.5 trillion in early 2018.1 That’s almost 10% of the Gross Domestic Product in the U.S.2 Among those who take out student loans, the average student loan borrower has $37,172 in loans at graduation.3 College can cost between $10,000 and $40,000 (or more) each year.4 Multiply $40,000 by four years and you’re looking at a bill of $160,000 at graduation.

Don’t panic. It does seem like a lot of money, but before your fingers start shaking and you spill the gravy, take heart. Student loans can be manageable and affordable. Better yet, they can lead the way to a bright career and future.

Student loans explained

Breaking down the student loan process into pieces can make it as easy as pie. Some of the most common questions about student loans can be answered with just a little time. With a bit of preparation, you’ll be ready to have that student loan conversation and then move on to dessert.

What is a student loan and how does it work?

A student loan is money that you borrow from a lender. This lender might be the federal government, which offers student loans, or a private lender. The funds can be used to help pay for college or graduate school. You then pay that amount back to the lender. Say you take out a loan for $50,000. You can use that toward college costs and then pay it back over time.5

In addition to paying back what you borrow, you’ll need to pay interest, too. Think of this as the cost of being able to use the money. You’ll usually need to pay interest on the loan balance every month. The interest rate could be fixed or variable. If it’s a fixed rate, it won’t change over time. A variable rate, however, may fluctuate. It could change every month, quarter or year.

When taking out a student loan, check for a limit. This indicates how much you can borrow. Student loans from the federal government, for instance, set a limit based on factors such as what type of school you’re attending. If you’re in college, there might be a different limit than if you’re in graduate school because different programs vary in cost.6

What is the goal of a student loan?

Not everyone can afford to pay for school on their own or with their savings, and that’s okay. Even though student loans come with a cost, their purpose can be priceless. A student loan can be used to go to school, which can open all kinds of doors. Through school, you could get a great education and build the foundation for a dream career.

Paying a student loan back can also teach valuable life lessons. Making payments can help you become aware of budgeting and setting aside funds each month. These steps can lead you to think about other goals, like planning and saving for the future.

How do I take out a student loan?

Good question. You know they’re out there, but how do student loans work and how do you get one? You may have heard of federal student loans and private loans.

A federal student loan is a loan from the government. With a federal student loan, you can expect a fixed interest rate. There are some great benefits with this type of loan, including options to pay back the loan over a longer time. You may also be able to make payments based on your income and even delay paying it back if money is tight.

To start the process for a federal student loan, fill out the Free Application for Federal Student Aid (FAFSA).

A private student loan comes from a private organization. This could be a bank, credit union or another financial organization. The interest rate with this kind of loan might be fixed or variable. Some private loans ask that you start making payments while still in school, but others do not.7 It’s important to ask about rates and how to pay the loan back before you apply.

Since private student loans are available through different lenders with varying rates and terms, it can be worthwhile to compare before making a final decision.

What can student loans be used for?

To understand what a student loan can be used for, think of school-related expenses. College tuition, school fees, and textbooks are typical costs that student loans can be used for. Other school-related expenses include electronics, like a laptop you might need to buy for college. Transportation, meals and housing can also be covered with student loan money.

What are student loans not used for?

Since they are created for school purposes, items that are not related to education are often not considered something student loans can cover. Items such as dorm room decorations, a new car or a spring break trip probably wouldn’t be paid for with student-loan funds. Student loans are also not usually designed to be used for starting a new business, buying a new wardrobe or eating out at restaurants.

Before you get a student loan, you can spend some time looking at what expenses you’ll have for school. Keep in mind that once you take out a loan, you’ll have to eventually pay it back. For this reason, if you take out a smaller amount now, you might be able to pay it off faster in the future.8

How much could you pay on student loans per month?

The amount you’ll spend on student loans each month can vary depending on different factors, such as if the loan is a federal loan or a private loan. The interest rate will also impact how much you pay every month. Timing can play a role, too. Some student loans don’t require you to make payments while you are still in school, for instance.

Perhaps you take out a loan with no fees for $20,000. Depending on if you have a 4% interest rate or an 8% interest rate, your payments will differ.

Loan amount Interest rate Monthly payment Total interest Total amount
$20,000 4% fixed $202.49 $4,298.84 $24,298.84
$20,000 8% fixed $242.66 $9,118.32 $29,118.32 9

Thinking about how much you might have to pay before you take out a student loan will help you prepare to budget for it. It might also help you decide how quickly or slowly you’d like to pay it off.

Keep in mind that what you pay could be different if the rate is variable. You can also consider an income-based repayment plan. This type of plan is set up in a way that makes it possible to send in payments based on your income level.10

It’s a lot to consider, but having the right knowledge can help you start planning for the future so that you’re ready when the time comes to start choosing your student loan path. Plus, you’ll be all set to discuss the student loan process over Grandma’s apple pie. Pass the whipped cream, please.

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