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Understanding Student Loans

The topic of understanding student loans has become a popular one in the United States over the years. Are you one of the 45 million Americans carrying student loan debt? You read that right – 45 million! Student loans are one of the most common debts carried by people in our country, so it would be no surprise if you have student debt.

Types of Student Loans

Whether or not you have loans, you may or may not know the difference between the different types. There are two main types of student loans: federal and private. Federal student loans are given by the government and offer fixed interest rates and repayment plans that are based on your income. These include Direct Subsidized Loans (based on financial need), Direct Unsubsidized Loans (determined by the school you’re attending), and Direct PLUS Loans (unsubsidized, credit-based loans for parents and professional students, also known as Parent PLUS loans). Private student loans are given by banks, credit unions, and state-based lending institutions, or a parent or guardian who takes out a loan to help the student. This helpful chart details the difference between the types of student loans available.

Are Student Loans Bad?

Most of the time, student loans are considered “good debt” because the person taking out the loan is investing the money in their future. Obtaining a bachelor’s degree puts most people in a position to make more money. However, student loans become problematic when people borrow more money than they need during the time they’re in school. Often, people are borrowing more to support a lifestyle that is beyond their actual needs. Student loan money should not be used for eating out, getting your nails done, attending a sporting event, etc. — because remember, this money will be owed back with interest! If you do find yourself with leftover money, either put it towards your balance to reduce your total loan cost, or use it towards other education-based spending such as textbooks, transportation, and technology used for schoolwork.

Student Loan Relief

If you have any federal student loans, you’ll be happy to hear that the Coronavirus Aid, Relief, and Economic Security (CARES) Act is suspending all principal and interest payments through September 30, 2020. Between now and September 2020, you don’t need to make a payment and no interest will accrue on your balance. The balance you have now will be the same balance in September. If you’re currently in default, all collections have ceased.

With private loans, many issuers are offering forbearance for 90 days, and some are waiving late fees or allowing for a reduced payment option. If you have a private loan, you should contact your lender to make sure you understand their policy.

Paying Off Debt

Here are two avenues you can take to pay off debt faster if you’re carrying student loan debt:

  1. Take a look at one of your loan statements.
    Is your payment going to principal or interest first? You want to change your terms to put more towards the principal. Or, increase the number of payments on your loan, but continue to pay the same amount. For example; let’s say you owe $100 a month on student loans. You’re putting $85 towards interest and $15 to the principal. If you were to pay $50 twice a month, you’re increasing the payment frequency, which should automatically lower the interest. (Right now, with the CARES act, any payments towards federal student loans are being put towards your principal.)
  2. Pause your loan payments and put that money somewhere else.
    If you’re still working and your income hasn’t changed, use the break offered by the government or your private lender as an opportunity to get ahead on another aspect of your financial management. Plug that money into paying off credit card debt or building your emergency fund.

When it comes to understanding student loans, do you feel overwhelmed by your current loans? We’d love to work with you on forming a realistic, manageable plan for your spending, saving, and debt repayment. Schedule one-on-one coaching with us today!