What You Need to Know about Student Loan Debt

What is a student loan?

This is money you borrow to help you pay for postsecondary education like college or technical training. Loans must be repaid. In almost all cases, you must repay the loan with interest.

What is interest?

This is the fee you pay to a lender for using the lender's money.

What is the current interest rate on student loans?

Student loan interest rates vary widely. A variety of financial institutions offer private loans. FinAid, a free financial aid website for students, has a Private Student Loan Comparison Chart. On this chart, prospective student borrowers can research the loan products offered by 26 different financial institutions.

Congress sets federal loan interest rates, but the rates rise and fall over time as they change in the private market. For example, according to the Federal Student Aid website, a federal Direct Subsidized loan for undergraduate students had an interest rate of 3.68 percent for loans disbursed between July 1, 2013, and July 1, 2014, but a rate of 4.66 percent for loans disbursed between July 1, 2014, and July 1, 2015.

If you want to compare the differences between federal loans and private loans, the Federal Student Aid website offers a comparison chart.

What types of federal loans are available?

Direct Subsidized Loans: These are loans for students who have evidence of financial need. The U.S. Department of Education pays the interest payments on these loans while the borrower is a full-time student.

Direct Unsubsidized Loans: These loans do not require the student to demonstrate financial need. The loan begins to accrue interest as soon as it is disbursed. However, students may defer their interest payments while in school and have the interest added to the principal they borrowed.

Perkins Loan: These are loans for students who can demonstrate exceptional financial need. The interest rate is always 5 percent. Payments typically begin nine months after the student is no longer enrolled in school at least half-time.

PLUS Loans: PLUS (Parental Loans for Undergraduate Students) Loans are available to parents of undergraduate students or to students in graduate and professional school. These loans have a higher interest rate and a higher fee than other federal loans. Borrowers must have satisfactory credit in most cases. Interest begins to accrue as soon as the loan is disbursed. Payments may be deferred while the student attends school at least half-time.

How do I apply for federal student loans?

All students should begin the loan process by completing the Free Application for Federal Student Aid, or FAFSA. The information in this document can unlock not only federal loans but also state and school-based aid. Students who think there is no reason to complete the FAFSA should check out Myths about Financial Aid.

How can I get help completing the FAFSA?

There are many resources to students fill out the FAFSA. The Federal Reserve Bank of St. Louis offers a Personal Finance 101 Conversations series about the FAFSA. The Federal Student Aid website has an instructional video to help students prepare for filling out the FAFSA. Students can visit the Federal Student Aid website when they're ready to begin the FAFSA form.

If I have to take out a federal education loan, are there any circumstances under which I would not have to repay the loan?

The Federal Student Aid website has a detailed chart explaining all the situations under which a loan might not have to be repaid. It is important to remember that the laws regarding student loans are subject to changes by Congress, so these options on the chart may or may not be available at the time the student begins repayment.

Forgiveness

Teachers in low-income elementary or secondary schools for five consecutive years can have up to $17,500 of their federal Direct Loans forgiven. For teachers who are reading this, your FFEL Stafford Loans are eligible for this type of loan forgiveness, too. The Stafford Loan program is no longer available to current students.

Discharge

Some types of student loans can be discharged if the borrower becomes permanently disabled. If a student dies, the student's estate can have the loan discharged. In some rare cases, student loans may be discharged if the borrower declares bankruptcy. The Federal Student Aid chart explains the conditions required for this type of discharge. In this age of identity theft, it is good to know that a loan obtained in your name by fraudulent means is eligible for discharge.

Cancellation

Cancellation is an option associated with the Perkins Loan program. The Perkins Loan Cancellation Summary Chart from Federal Student Aid gives a comprehensive list of conditions under which borrowers can cancel their loans. The Perkins Loan program is unique in offering cancellation to people in a variety of public service fields, including teaching, law enforcement, nursing, Peace Corp volunteerism, firefighting, early childhood education, and several others.

What if I have trouble repaying my loans when I am no longer enrolled at a school or college?

The federal student loan program wants students to be successful in their loan repayment obligations. The program recognizes each borrower has a unique set of financial circumstances. For this reason, there are seven different payment plan options available. It is also possible to delay or suspend repayment by using a forbearance or deferment option. These options can help students get back on their financial feet without the threat of default looming over them.