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Everything You Need to Know About US Student Loans

Everything You Need to Know About US Student Loans main image

If you’re studying in the US, you might be confused about the different types of student loans available. How do you know which one is right for you? How do the repayment plans work and why are there so many of them?! 

There’s no need to give yourself a headache.  We’ve devised a simple, straightforward summary of everything you need to know about US student loans.

What are the different types of student loans? 

What are the different types of student loans?

There are two main types of student loans: federal student loans and private student loans.

Federal student loans are loans from the government, whereas private student loans come from private sources such as banks or financial institutions.

Federal student loans

Federal student loans are run by the US Department of Education. They’re the largest provider of student financial aid in the US and are used by more than 13 million students each year. 

There are four types of Federal student loan: direct subsidized loans, direct unsubsidized loans, direct PLUS loans, and direct consolidation loans.

If you’re an undergraduate, you can borrow a maximum of US$12,500 per year in the form of Direct Subsidized Loans and Direct Unsubsidized loans.

If you’re a graduate, you can borrow up to US$20,500 each year in Direct Unsubsidized loans, using Direct PLUS Loans to cover any other costs at college.

Still confused? Don’t worry, we’ll discuss different types of loans in more detail below.

Direct Subsidized loan

Direct subsidized loans are loans available for undergraduate students who can demonstrate sufficient financial need.

If you’re eligible for a direct subsidized loan, the US Government will pay the interest on the loan while you’re at university and you’ll only start to repay the loan (and being charged interest) six months after graduation.

Direct Unsubsidized Loans

Direct unsubsidized loans are available for both graduates and undergraduates. With a direct unsubsidized loan, students will start paying interest as soon as the school receives the loan. However, students will only be required to pay back the loan six months after graduation.

If you choose not to pay interest on your loan while you’re at university, this interest will accumulate and will be added to the value of your overall loan.

Direct PLUS Loans

Direct PLUS Loans are for graduate or professional students and parents of dependent undergraduate students.

The difference between these loans and any other federal loan is that direct PLUS loans can help pay for education expenses not covered by other financial aid, such as accommodation. Interest on the loan will be paid by the student from the moment the school receives the loan.

You’ll start to repay your Direct PLUS student loan six months after you graduate, leave school or drop below half-time enrollment.

Direct Consolidation Loans

A direct consolidation loan makes it easier to manage your student loans by having them all in one place and will allow you to gain access to the government’s coronavirus student debt relief.

You’ll only pay a single monthly payment instead of multiple payments and converting to a direct consolidation loan will open up many different repayment plans.

Private student loans

Private student loans are usually significantly more expensive than federal student loans and usually come with much higher interest rates.

The lender is not associated with the government and is free to decide their own interest rate and repayment terms, so these will vary depending on your student loan provider.

Private loans are a good option for students who are looking for extra student loans, in addition to federal student loans. They give you the option to borrow only what you need and find the right repayment terms for you.

How to apply for a student loan

How to apply for a student loan

To apply for a federal student loan, you’ll firstly need to fill in the Free Application for Federal Student Aid (FAFSA) to see if you’re eligible for federal grants, work-study and federal loans.

Based on the results of your FAFSA, your college will send you a financial aid offer, which will include federal student loans. 

How you apply for a private student loan will depend on your lender. However, to apply for most private loans you’ll be asked to share a few details about yourself. The lender will then do some basic credit checks to see if you’re eligible. (Find out how to boost your credit score here.) The lender will then let you know if you’re eligible for the loan and, if you are, will arrange to send over the funds.

How to repay your student loan

Students with a federal student loan can change their repayment plan for free once every year, so long as the maximum loan term for the new plan is longer than the amount of time your loans have already been in repayment. Trying to charge students to change their repayment plan is a common student loan scam which students should be aware of. 

Each of these repayment plans are open to all federal student loans, unless specifically stated otherwise.

Private student loan repayments are entirely dependent on the lender, so you’ll need to agree the repayment terms when you take out the loan.

These are the main repayment plans for students with federal student loans: 

Standard repayment plans

You are automatically put in the standard monthly repayment plan when you open your student loan but have the opportunity to switch at any time. Under the standard monthly repayment plan, students will make equal monthly repayments for ten years.

Under this plan, you will most likely repay your student loan faster and will pay less interest overall.

Graduated repayment plans

If you choose a graduated repayment plan, you’ll be repaying your student loan for ten years, but this repayment loan helps to keep the repayment costs low for recent graduates.

This is because recent graduates may have low starting salaries but will expect to see their salaries increase over the ten-year repayment period. Under this plan, the amount you’ll be repaying each month will increase every two years, to match your (hopefully increasing) salary.

Extended repayment plans

This plan is much like the graduated repayment plan but allows you to extend the time you repay from 10 years to 25 years. This will reduce the amount you pay each month but will increase the amount you pay in interest overall. 

This plan is available to anyone who has over $30,000 in student loan debt.

Income-based repayment plans

Income based repayment plans are available for federal student loan holders and can help get some of your student loan forgiven. 

There are four different types of income-based repayment plans:

  • Pay As You Earn Repayment Plan (PAYE): Monthly repayments are limited to 10 percent of your income after tax and the remaining balance is forgiven after 20 years. 
  • Revised Pay As You Earn Repayment Plan (REPAYE): Monthly payments are 10 percent of your income after tax and any outstanding balance will be forgiven after 25 years.
  • Income-Based Repayment Plan (IBR): Monthly payments are 10 to 15 percent of your income after tax, depending on when you received your loan. Outstanding amounts after 20 or 25 years (depending on when you started the loan) will be forgiven, but you may have to pay income tax on this forgiven amount.
  • Income-Contingent Repayment Plan (ICR): Monthly repayments are 20 percent of income after tax or fixed payment over 12 years adjusted to your income. After 25 years, the outstanding balance will be written off.

Income-sensitive repayment plans

Income sensitive repayment plans are available to anyone with a subsidized federal student loan, unsubsidized student loan, federal PLUS loans or federal consolidation loans. 

Under this repayment plan, your monthly payments will increase or decrease each year based on your annual income and you’ll pay for a maximum period of 10 years.

Can your student loan ever get written off?

 Can your student loan ever get written off?

Yes, but only under extremely rare circumstances. Student loan discharge is usually awarded by a judge. 

Your student loan may be discharged for several reasons:

  • Permanent disability
  • Death
  • Identity theft
  • Bankruptcy
  • False certification of student eligibility
  • A university’s unauthorized signature of the loan without your knowledge

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Written by Chloe Lane
A Content Writer for TopUniversities.com, Chloe has a bachelor’s degree in Economics from the University of Reading and grew up in Leicestershire, UK. 

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