6 Things to Know About Student Loans

Countless students rely on loans to help finance their college educations. According to the Pew Research Center, 25% of U.S. adults under 40 have student loan debt, contributing to a nationwide student loan debt of over $1.6 trillion.

While enabling educational opportunities, student loans can impose a substantial financial burden. These loans provide immediate financial relief for tuition and college expenses but often lead to long-term challenges in managing debt. Before you borrow, here’s what you should know.

1. There are many different types of student loans.

Not all student loans are created equal; some have more favorable terms than others. Understanding different loan types can help you make informed decisions that protect your future financial well-being. 

Federal vs. Private

Loans are federal or private. The U.S. government offers federal loans with a fixed interest rate — the rate doesn’t change during the life of your loan. Qualifying for a federal loan requires submitting the FAFSA. The government evaluates your family’s finances to calculate your eligibility for federal loans.

Private lenders like banks and credit unions offer private loans. Income and credit scores determine their interest rates, which may be fixed or variable. Private loans tend to have higher interest rates; qualifying may require a parent co-signature.

Subsidized vs. Unsubsidized

Federal student loans are subsidized or unsubsidized. The difference? When interest starts accruing.

Subsidized loans don’t charge interest while you’re still in school. The government covers interest payments while you’re a student and six months post-graduation. Unsubsidized loans start accruing interest when you receive your first loan payment. Interest accumulates while you’re in college, increasing the total repayment amount.

Let’s say you borrow $8,000 with a 4.99% fixed interest rate for an undergraduate degree:

• Principal Balance: $8,000
• Interest Accrued during school: $0 subsidized vs. $1,069 unsubsidized
• Total balance after 6-month grace period: $8,000 subsidized vs. $9,069 unsubsidized

Parent PLUS Loans

A PLUS loan is a federal loan specifically for parents choosing to borrow. These federal loans have a fixed interest rate but aren’t subsidized; borrowers repay all accrued interest. To apply, parents must create their own FSA ID and complete a credit check.

2. Interest rates determine your total loan cost.

When calculating how much to borrow, know your loan’s interest rate, which directly impacts what you’ll pay over the life of your loan, and these key terms.

• Principal: Initial dollar amount borrowed
• Interest: Additional dollar amount owed
• Interest Rate: Percentage of principal charged as interest 
• Interest Rate Factor: Interest rate divided by the number of days in the year
• Outstanding Balance: Dollar amount left to repay

Fixed vs. Variable Interest Rates

Your loan will have a fixed or variable interest rate. Fixed interest rates never change. The current fixed interest rates for 2024-2025 are 6.53% for undergraduate student loans and 9.08% for parent PLUS loans. Variable interest rates can change yearly and may be higher or lower than the fixed federal rates.

Simple vs. Compound Interest

Simple interest is calculated based on the original amount of your loan. Multiply Outstanding Principle Balance x Interest Rate Factor x Number of Days Since Last Payment.

For example, if you borrow $20,000 at 5% interest:

Daily Interest:
$20,000 × (5% / 365) = $2.72 per day.

Monthly Interest (30 days):
$2.72 × 30 = $81.60.

Alternatively, compound interest is calculated based on the original amount of your loan plus any accrued interest. Interest — and the total outstanding balance — grow exponentially over time.

For the same $20,000 loan at 5% interest:

Day 1:
Interest = $20,000 × (5% / 365) = $2.72.
New balance = $20,000 + $2.72 = $20,002.72.

Day 2:
Interest = $20,002.72 × (5% / 365) = $2.72.
New balance = $20,002.72 + $2.72 = $20,005.44.

Monthly Interest (30 days):
Total interest = $83.50.

While a few dollars may not seem like much, it adds up over 20 years.

3. You have multiple repayment plan options.

The terms of your loan include different repayment options. Private loan choices can vary. Federal loans offer a variety of repayment plans.

• Fixed Payment: Standard, Graduated, and Extended Repayment Plans
• Income-Driven: Saving on a Valuable Education (SAVE), Pay As You Earn (PAYE), Income-Based, and Income-Contingent Repayment Plan

Your repayment plan determines your monthly payments. Like a car loan or mortgage, fixed payment plans have a set number of months for repayment. However, depending on your salary, these monthly payments may not be realistic. Income-driven plans determine your monthly payments based on income after taxes and essential costs.

If you’re struggling, you can apply for deferment or forbearance — a temporary pause on your payments. Your loans may still accrue interest. You may be eligible to consolidate federal loans into one lower monthly payment with a Direct Consolidation Loan. A caveat: consolidation can affect your eligibility for certain loan forgiveness programs.

4. Loan forgiveness programs can help eliminate your debt.

Your federal student loans may be forgiven, canceled, or discharged, eliminating your responsibility for paying back any outstanding loan balance. 

• Public Service Loan Forgiveness (PLSF) applies to individuals employed by the government or non-profits who have made 120 monthly payments.
• Teacher Loan Forgiveness program helps qualified teachers who have worked five straight years at a low-income school.
• Income-driven repayment plans may forgive any remaining balance if your loans aren’t paid off by the end of the repayment period (20-25 years).

5. Missing payments has serious consequences.

Missing loan payments can lead to delinquency and/or default, negatively affecting your credit score. You lose options for deferment, forbearance, and repayment, and the lender may withhold wages and tax refunds. Understanding repayment status helps keep you on track.

6. Borrowing wisely is key to avoiding excessive debt.

Before borrowing, carefully review your loan’s terms, including its interest rate and repayment options. Think long-term, including how your career choices will impact your ability to make payments. If you’re currently applying to colleges, maximize other aid before borrowing. Scholarships don’t require repayment. Submit your FAFSA and CSS Profile to qualify for institutional grants, federal loans, and other aid.

Want more tips and insights? Check out our full Guide to College Admissions here.