7 Things To Know About Student Loans As A First-Time Borrower

For many individuals, student loans make it more attainable to attend college since they can’t afford to pay the entire cost of school out of pocket. However, student loans can feel intimidating to think about, especially if you’re going to be a first-year student and have never had to deal with them before. One of the most important things to know about student loans is that it’s not free money. You will need to pay back the balance in full at some point. Your payments are broken up into smaller monthly amounts over a specified period of time. There are also two parts to your monthly payment: The principal and the interest. The principal is a part of the total amount you borrowed and agreed to pay back. The interest is the cost of borrowing that amount, usually assessed as a percentage. Below, CNBC Select outlines a few other key things to know about borrowing student loans.
What we’ll cover
You can choose between federal loans and private loans
A federal student loan is money you borrow from the federal government. A private student loan, on the other hand, is money you borrow from a private institution, like a bank or credit union. Besides the source of the money, here are the key differences between the two loan types. With federal student loans, payments aren’t due until after you graduate or your enrollment status drops to less than half-time (which is defined by your school). But with private student loans, payments are typically due immediately even while you’re still in school (some private lenders may allow students to defer payments while still enrolled, but you’ll have to double check with your specific lender). You also don’t need a credit check for federal student loans but a credit check and/or co-signer are typically required to borrow private student loans. Additionally, federal student loans provide some protections that you won’t get with private student loans. For instance, during the start of the COVID-19 pandemic, the government implemented a payment pause on all federal student loans to provide some financial relief to borrowers. This pause was not extended to private student loan borrowers.
You’ll also choose between subsidized and unsubsidized loan options
Keep in mind that all student loans charge you interest; the key difference between subsidized and unsubsidized loans, though, is when that interest starts accruing. With subsidized loans, you only start accruing interest charges: After you’ve dropped below half-time enrollment
Your grace period after graduation ends
Your loans are in a deferment period With unsubsidized loans, though, interest accrues during each of those periods, potentially making this loan more expensive.
You don’t have to accept the full funding amount offered to you
One important thing to remember is that while you may be offered a large amount of student loan funding, you don’t have to accept every dollar offered. In fact, most students probably shouldn’t. Student loans aren’t a gift; the amount you borrow will need to be paid back in full. Because of this, you should carefully consider exactly how much money you need to borrow before accepting your loan awards. This way, you can make sure you aren’t borrowing more than you can pay off. Keep in mind that if you’re applying for federal loans through FAFSA, you’ll also be notified if there are any grants available to you. Unlike loans, grants don’t need to be paid back. You may also qualify for institutional aid from your university, like scholarships. If you don’t qualify for scholarships from your university, you can also seek scholarship funding externally. Also consider taking on part-time work on campus and using some of that income toward tuition costs. Every little bit helps you avoid taking on a larger student loan debt burden.
You may receive a grace period after graduating before you’ll have to start making payments
If you’re a Direct Subsidized, Direct Unsubsidized, or Federal Family Education Loan borrower, you’ll have a six-month grace period before you must begin making student loan payments (federal Perkins Loan borrowers receive a nine-month grace period). The grace period gives you time to get financially prepared to begin making payments. Make sure you’re all set up with a student loan servicer and that they have your correct contact information. You should also double-check how much you owe, which can help you decide which repayment plan is best for you. That being said, if you decide you want to change your repayment plan, this grace period would be a good time to reach out to your loan servicer to inquire about plan changes. And while you don’t have to make payments during the grace period, it can be a good idea to get a head start on chipping away at your debt balance if your finances are in order. Keep in mind that if you have a subsidized student loan, you don’t start accruing interest until after the grace period ends. If you start making paying during the grace period, you have a chance to lower the principal amount you owe before interest kicks in. That means you can potentially pay off your debt quicker, which results in fewer interest payments over the life of the loan and saves you money.
There are a variety of repayment options available
If you’re a federal student loan borrower, there are many different repayment plans you can choose from. Here are some key features of each. Standard repayment plan Monthly payments are fixed, equal amounts and are meant to be paid off within 10 years (though, it could be paid off in up to 30 years for consolidation loans).
If you’d like to be considered for Public Student Loan Forgiveness (PSLF), don’t enroll in this repayment plan as it doesn’t qualify for PSLF. Graduated repayment plan This plan lets you start with lower monthly payments that increase slightly every two years.
The monthly payment amounts and the increases are adjusted in a way that ensures you’ll pay off the balance within 10 years.
This is also typically not a repayment plan that qualifies for PSLF. Extended repayment plan This plan is meant for those who have a loan balance of more than $30,000.
Monthly payment amounts are structured in a way that should allow you to pay off the balance in 25 years.
This is also typically not a repayment plan that qualifies for PSLF. Revised pay as you earn plan This payment plan is based on your monthly income and your family size, and you’ll have to resubmit that information every year even if nothing has changed. Payments will be recalculated each year.
Under this plan, your monthly payments will be 10% of your discretionary income.
If you have an outstanding balance after 20 years, it will be forgiven (if all loans were taken out for undergraduate study). This forgiveness timeline is extended to 25 years if any loans were taken out for grad school or professional study.
You may be taxed on the forgiven amount.
This repayment plan does qualify for PSLF. Pay as you earn plan With this plan, your monthly payments will be equivalent to 10% of your discretionary income, but less than what you would have paid under the Standard Repayment Plan.
Payments are recalculated each year to account for any changes to your income or family size.
This repayment plan does qualify for PSLF. Income-based repayment plan Your monthly payments will be equivalent to either 10 or 15% of your discretionary income, but less than what you would have paid under the Standard Repayment Plan.
To be eligible for this plan, your debt balance must be high compared to your income.
If you have an outstanding balance on your loan, it will be forgiven after 20 years or 25 years (depending on when you first received your loans).
You might be subject to income tax on any forgiven balances. Income-contingent repayment plan With this plan, your monthly payment will be either 20% of your discretionary income OR the amount you would pay with a fixed plan over 12 years, whichever is less.
If you have an outstanding balance, it will be forgiven after 25 years.
You might be subject to income tax on any forgiven balances.
This repayment plan qualifies for PSLF. Income-sensitive repayment plan This plan is only available to those who have loans under the Federal Family Education Loan Program.
With this plan, your monthly payment is based on annual income and structured so that your loan will be paid off within 15 years. For more information on repayment plans, see the Federal Student Aid website.
Interest can make it feel harder to pay off your balance
Many borrowers struggle with repaying their student loans because of the interest charges. Interest on federal student loans is generally lower than interest charges on private student loans. However, in both instances, interest charges can eat into your monthly payments and make it feel as if you’re taking one step forward and two steps back. A lower interest rate can help you potentially pay off your loan faster since it allows more of your monthly payment to go toward the principal amount. One way to seek a lower interest rate is to refinance your student loan. CNBC Select ranked SoFi Student Loan Refinancing as the best overall student loan refinance company, however, Citizens Bank Student Loan Refinancing is another solid contender if you need a co-signer.
SoFi Student Loan Refinancing Learn More Cost No origination fees to refinance
Eligible loans Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans
Loan types Variable and fixed
Variable rates (APR) From 4.63% (rates include a 0.25% autopay discount)
Fixed rates (APR) From 4.24% (rates include a 0.25% autopay discount)
Loan terms 5, 7, 10, 15, 20 years
Loan amounts From $5,000; over $10,000 for medical/dental residency loans
Minimum credit score N/A
Minimum income N/A
Allow for a co-signer Yes Terms apply.
Citizens Bank Student Loan Refinancing Learn More Cost No origination fees to refinance
Eligible loans Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans.
Loan types Variable and fixed
Variable rates (APR) 6.26% – 11.61% APR
Fixed rates (APR) 5.39% – 10.64% APR
Loan terms 5, 7, 10, 15, 20 years
Loan amounts A minimum of $10,000, up to $300,000 (bachelor’s degree or below) or $500,000 (graduate degree)
Minimum credit score Not disclosed
Minimum income $24,000
Allow for a co-signer Yes See our methodology, terms apply.
It’s important to always stay connected to your loan servicer
Whether you borrowed federal student loans or private student loans, it’s important to keep in touch with the company that’s managing your loan payments. This way, you can track your progress and stay aware of your balance. Plus, if anything comes up, you’ll want to reach out to them ASAP to make sure you avoid getting penalized for any missed payments or other circumstances beyond your control.
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Bottom line
Student loans can be a useful tool to make college more attainable for many individuals. However, it’s important to keep in mind that student loans are not free money and they must be paid back in full. For additional information, you can visit the Federal Student Aid website. Catch up on CNBC Select’s in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.