High School Series Part 6 – Understanding Debt: Federal vs Private Student Loans
January 3, 2014

Today is the final installment in our series for High School students. We’ll look at the different types of student loans and how they work. Many college graduates come out saying they had no idea how deep they had gotten themselves in debt, how many loans they had taken out and how much they would be expected to shell out each month after graduation. Here’s what you must know before you sign on the dotted line.

Types of Federal Loans

The primary type of student loans you’ll be offered from the government are called Direct loans (technically they are William D Ford Direct Loans) and are funded by the government to you (or your parents) directly. You may borrow under the subsidized or unsubsidized banner and parents can take out Direct PLUS loans. Those with great need may also qualify for a Perkins loan.

Subsidized loans – These are based on financial need and the “subsidized” part means that the federal government “pays” (or rather doesn’t charge) interest while you are in school. Loan limits are displayed in the chart below. The current interest rate is 3.86% but is expected to rise each year.

Unsubsidized loans – These are open to anyone without regard to need and interest accrues from the moment you sign for the loan. See limits below. Most students will qualify for a mix of subsidized and unsubsidized student loans. The current interest rate is 3.86% but is expected to rise each year.

Direct PLUS loans – These are taken out by parents to help pay for school. Interest begins to accrue immediately. The maximum amount of a PLUS loan for a given school year is the cost of school (tuition, room, board, books, fees) less any other financial aid offered. Interest on these loans is currently 6.41%.

Perkins loans – These are loaned from your college (but underwritten by the government) and not all schools offer these. Only students with extreme financial need will qualify, funds are limited and are on a first come-first served basis. Limits are $5,500 per year and interest is currently at 5%.

Private Student Loans

A number of private organizations offer private loans to rising college students, but there are some caveats to consider. Federal loans have income sensitive repayment plans for those who experience difficulty paying back their loans. Some private lenders will offer this option and some will not. Federal loans also offer forgiveness after 20-25 years of regular payments under a qualifying plan like Income Based Repayment (IBR) or Pay As You Earn (PAYE).

Private loans also will not qualify for discharge under Public Service Loan Forgiveness plans or military loan repayment plans. Some private repayment plans – also called Loan Repayment Assistance Programs (LRAPs) – may help pay back private loans. This is on a program by program basis. High earning careers (medicine, law, etc) where educational costs are high as are salary potential make more sense for taking out private loans than for those pursuing liberal arts degrees.

Always Know What You Owe

A recent Fidelity Investments survey showed that graduates of the class of 2013 gain their Bachelor’s degree alongside an average of $35,200 in total debt made up of student loans, credit card debt and loans from family members or that family took out on their behalf. 40% of these grads regret piling on this debt and didn’t know how deep they were in until it was too late.

Make sure you’re never in this position. Sign up now for a free student loan management account with Tuition.io. As soon as you start accruing loans, they will appear in the easy to read dashboard and you’ll always know how much you owe, to whom and how much your debt will cost you each month upon graduation. This will give you an ongoing reality check into the consequences of debt.

Consider Pay As You Go

We wrote yesterday about working while in school to minimize what you have to take out in loans. If you won’t earn enough between now and when school starts this Fall to pay your out of pocket costs, you’ll likely have to take out loans. If this is the case, borrow the bare minimum you can and stick to federal loans if at all possible.

But then work in the summers and breaks and throw any disposable income you can at your loans. You do not have to wait until you graduate to begin paying back loans. Also send this link to your friends and family and ask them to forego birthday and Christmas gifts and help you pay your student loans instead. Tuition.io’s gifting option protects your privacy – no one will know how much you owe.

When you sign up for your free Tuition.io account you’ll have the option to enroll in alerts so you’ll receive blog updates with tips on paying your debt, student loan news and other fun stuff. Remember – borrow wisely, borrow as little as possible and always know what you’ve borrowed.

Read all of our blog series for High School students:

High School Series Part 1 – Understanding College Costs

High School Series Part 2 – Applying for Financial Aid and Scholarships

High School Series Part 3 – Evaluating Financial Aid Packages

High School Series Part 4 – Making Your College Choice

High School Series Part 5 – Strategies to Minimize Borrowing

High School Series Part 6 – Understanding Debt: Federal vs Private Student Loans