Paying back student loans, what to expect.

woman african american pretty girl happy online virtual learning distanceAs you prepare to head to college the last thing on your mind is probably paying back your student loans. Many students take them out without knowing what paying them back will look like. Here we will give a brief explanation on student loan types, what repayment might look like for you, and some strategies to tackle it faster.

Student loans have seemed to become almost a staple when attending college due to rising tuition costs. They allow you to cover some of the remaining expenses after scholarships, so you don’t have to pay upfront. Let’s begin with the two options you can apply for, federal loans or a private loan.

Federal student loans come in two types, subsidized and unsubsidized. Subsidized student loans do not accrue interest while you are in school** and are typically given to those with financial need. Unsubsidized loans are not based on financial need and accrue interest while in school. Both options have simple interest, which means interest is only charged on the principal amount and not the principal and any unpaid interest. This is very important because it means that the amount of interest you pay will not be as high as a compounding interest loan, one where interest is charged on the principal and unpaid interest.

Federal student loans may have the following:

  • Repayment may not be required until after you graduate or drop below the enrollment requirements
  • Possibility to postpone loan payments
  • Altering repayment plan to meet your income
  • No prepayment penalty fees
  • Interest may be tax deductible
  • Loan forgiveness options depending on field of work

Private loans on the other hand do not have subsidized versions and can typically be like the unsubsidized federal loans. They work like any other traditional loan. They will typically accrue interest while you are in school, can have fixed or variable rate interest, and may require repayment while in school. These rates are also determined by not only your need, but your credit worthiness and may require a co-signer if you have a limited credit background.

For private loans may have the following:

  • Limited if no postponement options
  • Repayment plans may not be flexible to work with your income
  • Interest may be tax deductible
  • Option for no prepayment penalty fees with some plans
  • Typically, they do not offer loan forgiveness.

To apply for federal loans, you will need to complete a FASFA form and that will be used to determine how much you can borrow. Federal loans may not cover the entire gap in expenses and that is when some students will get a private loan for the difference. So now that you know the difference between the loan options lets show you some monthly repayments possibilities based on current rates estimates and different loan amounts*.

If you took out $5,000 a year for a total of $20,000 in a federally loan your monthly repayments at a 3.73% APR interest rate for 15 years:

  • Subsidized – $145.25 a month *
  • Unsubsidized – $162.85 a month*
    • $2,424.50 in simple interest while in undergraduate degree*

If you took out $10,000 a year for a total of $40,000 in federally loans at the same rate of 3.73% APR for 15 years:

  • Subsidized – $290.49 a month *
  • Unsubsidized – $317.58 a month*
    • $3,730.00 in simple interest while in undergraduate degree*

If you took out $20,000 a year for a total of $80,000 in federally loans at the same rate of 3.73% APR for 15 years:

  • Subsidized – $580.98 a month *
  • Unsubsidized – $635.16 a month*
    • $7,460.00 in simple interest while in undergraduate degree*

Say you took out $5,000 a year in federal loans and $5,000 a year in personal loans. For the federal loans you got an unsubsidized loan at the same rate of 3.73% APR for 15 years:

  • Unsubsidized – $162.85 a month*
  • Personal Loan Year 1 – $68.34 a month
    • 4.0% APR interest for 7-years
  • Personal Loan Year 2 – $69.50 a month
    • 4.5% APR interest for 7- years
  • Personal Loan Year 3- $69.97 a month
    • 4.7% APR interest for 7- years
  • Personal Loan Year 4- $70.67 a month
    • 5.0% APR interest for 7- years

However, for the personal loans you take out a new loan every year for $5,000 as a 7-year loan. For the first loan you need to begin payments directly after borrowing the loan and the same goes for each subsequent loan. These loans will take 10 years to pay off with the last three loans having one loan expire each year. For the first year your monthly payment would be $68.34, the next year would be $137.84 for both, then $207.81, and finally $278.48 for only the private loans when you graduate*.

In total for the first three years out of college your monthly payment will be $441.48, after the first loan ends the payment will be $373.14, $303.64 after the second loan, $233.67 after the third, and finally down to the $163 for the remaining 8 years*.

These amounts might not sound like much on paper, but they are equivalent to car payments and can impact your debt-to-income ratio. This means that these loans will impact your ability to qualify for other loans, including mortgages and auto loans until they are paid off*.

What are some ideas to help you pay off your student loan debt quicker?

  1. Be sure to pay off the student loan with the highest interest rate first.
  2. If you have a summer job during your undergrad or work part-time, try contributing half of what you would be saving towards your highest interest student loans.
  3. After graduation, move back home and contribute what you would pay in rent towards your student loans in addition to your monthly payment.
  4. Contribute an extra $50 a month towards your payment if you can. In an example where the loan amount is $5,000.00 at 4% APR for 15 years this will cut 53 months or almost 4 and a half years off your payment term. If you can only do $25 in the example above that is an extra 31 months or over 2 and half years shaved off your loan length*.

Being able to pay a little extra towards the principal in any way that you can, will help reduce the length of the loan and the amount of interest you will pay overtime. The more you borrow for your student loans the more you will be paying month to month. This is important to consider before going to college because after graduation it impacts your budget and your ability to qualify for loans such as a new car or a house. Deciding what you want to afford after graduation with the career you choose can help you pick the best school for you so you can get the most out of your degree.

Best of luck!

Check out our budgeting article to help build a monthly budget to help tackle student loan debt and stay in budget on campus.

Have a banking question? Email it to media@alltrustcu.com and it might be one of our next blogs.

* Numbers, rates, amounts, and terms are used for illustrative purposes only. These examples do not in any way represent what a borrower will pay during the life of a loan. Please contact a financial professional or financial advisor for more information.

**Subsidized student loans require that you be enrolled a certain number of classes, or hours, per a week to qualify for no accrued interest. Check with your loan provider and the school to ensure you meet the specifications required.