A student loan is when you or your guardian borrows money in order to pay for college. You can take out student loans for a number of reasons, and apply them to many different degree programs.
When a student loan is taken out, it’s usually only for one year of attendance. Most federal loans are disbursed per semester within an academic year. If you're borrowing for the academic year 2021-2022, you would get one installment at the beginning of fall semester 2021, and then another installment at the beginning of spring semester 2022.
You don’t need to stick with the same student loan provider for 4 years. You can borrow only federal loans one year, and then borrow from Sallie Mae, for example, the next year.
Federal Loans: For grad students, professional students, and parents of dependent undergrads. These are loans offered by the federal government.
Direct Subsidized Loan (aka Stafford Loans): For eligible undergraduates only who demonstrate financial need. Usually the cheapest option available for undergraduate students. The interest you owe doesn’t begin accruing until 6 months after graduation, which is also how long you have before you need to start paying back the loan (known as the grace period).
Direct Unsubsidized Loan (aka Stafford Loans): For eligible undergraduates and graduate students but eligibility is not based on financial need. You also have a 6 month grace period but interest begins accruing immediately after graduation.
Direct PLUS Loan: For grad students, professional students, and parents of dependent undergrads. Eligibility is not based on financial need, but a credit check is required. Interest rates may be higher on these loans, but you are able to borrow the entire cost of attendance.
Private Loans: For grad students, professional students, and parents of dependent undergrads. These are loans offered by private lenders, like Sallie Mae. They usually have credit requirements set by lenders and may require a cosigner. Can be less expensive than PLUS loans for those with good credit.
Here’s a side-by-side comparison:
Here some basic pros and cons between the two:
Interest Rate: An interest rate is best understood as the cost of borrowing a certain amount of money. When you take out a student loan or any loan, it will come with this cost. People normally look to get loans that have the lowest interest rates (keeping in mind any associated fees that add to the total cost).
Some loans don’t begin charging interest until a certain time after you graduate, some start charging interest immediately. Interest is expressed as a percentage of the total loan amount. If you took out a $5,000 loan, and your interest was 10% fixed a year, that would mean that every year, $500 would be added to your original loan of $5,000. (Yes, this is a simplified explanation that imagines you only pay off your interest each year to keep the 5k from growing or shrinking.)
While seemingly insignificant, the difference between a 10% and 5% fixed interest rate in the example above could mean thousands of dollars in savings.
Fixed-Rate: As the example above shows, a fixed rate will stay the same throughout the entire life of your loan.
Variable Rate: A variable rate is when an interest rate fluctuates through the repayment process. These interest rates rise and fall with something called LIBOR, which “serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks.”
A quick note: Federal loans only offer fixed rates while private lenders usually offer both. Variable rates for private loans are usually lower than fixed rates, but they can go up and down over time.
A quick note: As you may have heard, student loan interest rates are at historic lows, and there is a payment holiday in effect for federally held student loans. Federal loans will have 0% interest accruing and no payment collections until September 30st, 2021. While this holiday doesn’t apply to private loans, private lenders are offering lower interest rates as well.
Rate Discount: Many lenders offer specific discounts to stated rates.
Auto-pay discounts: typically a 0.25% rate reduction offered if you connect your bank account to your loan servicer
Relationship discounts: Some banks will offer up to a 0.5% rate discount if you open a bank account in addition to taking out a loan
Member discounts: Juno negotiates exclusive rate discounts (ie currently 1% for our undergraduate deal)
Fees: Applying for loans can come with fees. Here are a few common ones you may run into.
Origination Fee: A fee charged by a lender when you first take out a loan. The federal government is charging a 4.248% origination fee for Grad PLUS loans this year. Juno’s partner has no origination fee. That might mean the difference between several thousand dollars depending on the amount you borrow.
Prepayment Penalty: A fee if you pay back your loan ahead of the predetermined schedule. When you graduate, you become a lower credit risk and may be able to refinance your loans at a lower cost. Make sure your loan has no prepayment penalty, so you can refinance with ease. Very few lenders use this. Avoid it whenever possible.
Application Fee: There are pretty rare. Federal loan applications don’t have application fees, and most private lenders don’t either. If you come across a private lender with an application fee, it’s a red flag, so look closely at your loan terms.
The Basics of Paying for School:
Your COA (Cost of Attendance) is estimated by universities using these factors:
Tuition + Mandatory fees for course materials
Room & Board
Schools include multiple estimates for singles, couples, and families. If you aren’t living on campus, already have health insurance, or have scholarships, you may not pay the full COA, as you won’t incur the full cost of the items listed. Keep this in mind when researching schools, and when making other decisions, like if you should move on-campus, get an apartment, or stay at home.
It’s likely you’re going to be applying for financial aid in order to save money on the tuition portion of the COA. There are many different kinds of financial aid, and categories vary between universities. You will typically hear about merit-based aid as soon as you’re admitted. Most schools will have you apply for need-based financial aid after you’ve been admitted and accepted their offer. It’s within merit-based aid that most people are awarded things like scholarships or gift-aid by the school. Need-based aid will be based on separate applications, like FAFSA, or the university’s own need-based financial aid form. It typically takes 3-4 weeks to hear back about need-based aid.
Once you hear back from your university’s aid office, you’ll be presented with an award letter. Think of your financial aid award letter as a first draft as opposed to a finished product. If you really want to go somewhere and the cost after scholarships and aid is too high, try asking for more. Schools won’t rescind your acceptance just because you ask politely for more financial help, so try! Check out our template for negotiating more financial aid here.
A few tips when asking for more aid:
Be selective about asking. Make sure you really want to go to that program.
It usually helps if you’ve gotten into more than one school and can credibly tell one school that you’d choose it if you had more aid.
You’ve already been accepted. They won’t change their minds because you ask for some help politely. So make sure to ask.
Now that that’s out of the way, we can talk about the next step, which is taking out loans to cover what scholarships, merit-aid, and need-based aid won’t cover.
In general, the situation for MBAs is somewhat similar to getting a graduate degree. On the federal loan level, medical school students are eligible for the same $20,500 per year in Direct Unsubsidized Loans. After that, the rest of the COA has to be made up of a mix of Direct Plus Loans, Private Loans scholarships, or savings.
Avoiding loans when getting an MBA is pretty difficult, so choosing the right financing options is important. When it comes to borrowing money for business school, it’s common for students to use federal loans to finance their MBA. Then, after graduating, many MBAs choose to refinance to get a lower rate or better terms. At the same time, a large number of MBAs choose to keep their federal loans because of the benefits they provide.
Although federal loans may have higher interest rates than private loans, weighing the pros and cons of each is important. MBAs usually enter high-income jobs after graduation, meaning many don’t qualify for federal programs like Income-Driven Repayment Plans and Public Service Loan Forgiveness. This high income allows MBA graduates to pay down their debt quickly. Due to this, paying the higher interest rate of federal loans may not make the most sense, since it’s unlikely you’d be able to enjoy the program perks. That’s where private loans would come in, offering a lower interest rate. Remember that private loans usually require a credit check to evaluate your ability to repay and how risky you are. If you have a good credit score (650+) you will likely qualify for a loan, and the higher your score is, the better rate you will be offered. Adding a co-signer can also lower your rate.
If you are considering a career in public service, like working for the IRS, carefully consider if federal programs would influence your decision in taking out and holding on to your federal loans, instead of refinancing them for better terms after graduation. IDR plans may help offset the lower salary of a public sector job. The PSLF program may help you get portions of your debt canceled after graduation and entering the public workforce, alleviating your debt burden. Keep in mind that there is no guarantee that these plans will always be around, or they may change their eligibility requirements.
Basically, to understand if federal loan protections are worth it, you need to know how much you are paying for them. Comparing federal loan options to private loan options is the best way to do that, and Juno can help you do this for free.
Refinancing: The Low Down
What do you do after graduating? Well, you start having to pay back your loans. However, there is a way to save money through this process too, and that's refinancing. Refinancing basically means to finance (something) again, typically by taking out a new loan at a lower interest rate. The new, cheaper loan, pays off the old loan, and you save on the overall loan cost while likely lowering your monthly payment.
When you first take out a loan, the interest rate is set by a variety of factors including your ‘riskiness’ – the likelihood you’ll pay it back. Once you have a steady income, your ‘risk’ is reduced and lenders are more willing to give you a better deal. Refinancing usually works best for graduates who have Unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans. Refinancing federal loans may forfeit certain perks such as public service forgiveness and economic hardship programs.
It’s important to keep in mind what your career plans are and how those may affect your federal loans. If you are going into public service, you may want to keep your federal loans so that you may qualify for Public Service Loan Forgiveness. As we have mentioned already, there is also a federal student loan holiday in effect for federally-held student loans. Federal loans will have 0% interest accruing and no payment collections until September 30th, 2021. Refinancing these loans may not be in your best interest. If you have private loans, taking advantage of lower interest rates is a great way to save money on the loans you’re already paying for. If and when the federal loan holiday expires and you figure out your PSLF eligibility, there can be some serious perks to refinancing a federal loan into a private loan if your federal loan has a high interest rate.
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