Student Loans 101: What to Know Before Borrowing
BIG Ideas:
- There are two types of student loans – federal loans (available from the government) and private loans (available with banks, credit unions, and other lenders).
- Federal and private loans offer different interest rates, borrowing limits, qualification requirements, and benefits.
- The interest rate and type (fixed or variable) and the repayment term will impact the amount of interest you have to pay over the life of your loan.
It’s on! You’re getting ready for college, the most exciting time of your life. You’ll meet new people, uncover new interests, and learn what it’s like to live on your own.
There’s something else you’ll need to learn about in your college journey – student loans.
Sure, that’s not as exciting as learning a new language or joining a new club. It is, however, essential for helping you afford the cost of tuition and other college-related expenses, like books, living expenses, and a new laptop.
Ready for a crash course? Check out the information below for a quick glimpse of some important information to help you make the right choices.
What are student loans?
Student loans are loans offered by the government, financial institutions, or other private lenders to pay for college and related expenses. Unlike scholarships and grants, student loans must be paid back with interest.
What are the types of student loans?
There are two types of student loans: federal loans and private loans. The chart below will help you understand what they are and how they differ so you can choose the right loan for your situation.
| Federal Student Loans | Private Student Loans | |
| Lender | The US government | Banks, credit unions, non-profits (like Brazos) |
| Qualification criteria | Based on information provided in your FAFSA | Based on credit and income |
| How to apply | Complete the Free Application for Federal Student Aid (FAFSA) | Apply directly with lender |
| Benefits | Competitive rates
Flexible repayment terms including income-driven repayment Potential interest subsidies on federal subsidized loans Other protection benefits, like forbearance (the opportunity to lower or suspend payments if you face financial difficulty), and loan forgiveness |
Help bridge the gap where financial aid leaves off
Offer higher borrowing amounts that can help you afford the total cost of college
|
| Drawbacks | Limits on borrowing that may cover the full cost of college, which could result in unmet need | Strong credit is needed so you may need a co-signer
Not all private loans offer protections like income-driven repayment or loan forgiveness |
| Types of loans | Direct Subsidized Loans (based on need)
Direct Unsubsidized Loans (not based on need) |
Loans and terms vary by lender |
| Interest rate type | Fixed | Variable or fixed |
Please note: At Brazos, we encourage responsible borrowing. You should always exhaust all forms of grants, scholarships and other free financial aid before taking out a new loan. Not all private loan programs offer the same benefits as are available in the federal loan program. Do your shopping and find the loan that best fits your needs.
What are some key terms you should know?
Student loans have a language of their own. To understand and choose the loan that’s right for you, you’ll need to know some key terms:
- Principal: The total amount you borrow.
- Interest rate: The fee the lender will charge you for borrowing money, typically expressed as a percentage.
- Repayment term: The amount of time you have to pay back the loan.
- Loan servicer: The company that manages your loan, processes payments, and answers questions.
- Grace period: The six-month period after graduation before your loan payments begin.
- Deferment and forbearance: Options to temporarily pause payments, though interest may still accrue on certain loans.
What is interest and how is it calculated on student loans?
Interest is essentially the fee you pay to borrow money from a lender. It’s calculated as a percentage of the loan balance and added to the amount you borrow. Here are some important things to know about interest:
- Interest rates can be fixed or variable. A fixed rate means that your interest rate won’t change throughout your loan term, so your monthly payments won’t change. In contrast, a variable rate loan is based on an index and may go up or down during the loan term, which means your payments may rise or fall.
- How interest is calculated. Interest on student loans is usually calculated daily. You can find your daily interest charge by multiplying your interest rate by your principal and dividing by 365. For instance, with a $10,000 loan at 5%, you’d pay around $1.37 in interest each day.
- How interest accrues. Interest is charged each month and adds up, or accrues, until you pay the principal. With a federal subsidized loan, the government covers your interest while you’re in school and, thus, you are not “accruing” interest during that time. In contrast, with a federal unsubsidized loan and most private student loans, interest starts accruing (and growing) right away. At some point, usually, when you come out of a period of deferment or forbearance, the outstanding (or accrued) and unpaid interest is added to your principal balance, which is called capitalization. Capitalization will significantly increase the total cost of your loan over time as interest will now be charged on the higher principal balance.
- How your repayment term affects the interest you pay. The amount of money you’ll pay in interest depends on your interest rate and the repayment term. For example, some loan terms can be as long as 20 years. In that case, your monthly payments will be lower, but you’ll pay more in interest. With a shorter repayment term of 5 years, your payments may be higher, but you’ll pay less in interest over the life of the loan.
This is just a quick primer to help introduce you to student loans and guide you in making the right choices. For more information, including helpful articles, check out our blog.
Brazos is here to help make college affordable
For more than 40 years, Brazos Higher Education has been helping make education more affordable for students. As a Texas non-profit, we offer great rates and no fees on private student loans to help fill the gap where federal loans leave off. Contact us to learn more.
