Student Loans

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Smart Borrowing

While the words “student loan” and “loan debt” frighten many students, the truth is that student loans can be useful in funding an education. The key is to be a smart borrower:

You Don’t Have to Take All the Money

Your financial aid package will include a loan amount, but you don’t have to borrow that much. In fact, you should try not to. Think of this number as your limit, not your starting point.

You Can Borrow Some Now and Some Later

You won’t cut yourself off if you borrow only part of your loan amount now. Let’s say you decide to borrow half and see how far it will take you. If you hit a financial crunch before your school year ends, you can always go back and borrow some or all of the remaining amount.

Take Your Time Deciding

Most schools give you until May 1 to accept your award package. Use that time to continue seeking scholarships and to make a budget. Challenge yourself to trim your living expenses so you can reduce your loan debt.

Think About How You Spend

Once your loan money hits your bank account, you might have an urge to spend it. But keep in mind that the standard term of a student loan is 10 years. That pizza you’re about to order—do you really want to be paying for it, with interest, 10 years after you graduate?

Pay Off Faster and Pay Less

Student loan repayment isn’t like other bills—you can pay ahead on loans and save money. When you get your cell phone bill or your electricity bill, you pay the amount owed for that month. If you pay more, you’ll get a credit on your next bill, but the total you pay over time will be the same. When you’re paying off a loan, however, you can cut the total cost by making more than the minimum monthly payment. That’s because interest continues to accrue as you’re paying off the loan. The faster you pay it off, the less interest will accrue. Here’s how big a difference you can make: The average student loan borrower in Iowa would shave a full year off a 10-year federal loan by paying $27 extra a month. There’s no penalty for paying off federal student loans early.

Pay Interest While You’re in School

If your loan accrues interest while you are in school, you can cut the total cost of your loan by making interest payments while you are still in college. 

Help Is Available

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Types of Student Loans

Student loans are available through the U.S. Department of Education (FAFSA required) as well as private lenders. Generally, federal loans for students offer better terms and more flexible repayment options, but even federal loans differ. We recommend that students exhaust their eligibility for federal Direct Subsidized/Unsubsidized Loans before borrowing through other loan options. More information about available loans are provided below.

Direct Subsidized Loans

Direct Subsidized loans are federal loans for borrowers with financial need, as determined by your school’s financial aid office. The government pays interest while you are enrolled (at least half-time) and during your grace period. Repayment begins six months after you leave school or drop below half-time.

Direct Unsubsidized Loans

Direct Unsubsidized loans are federal loans that do not require financial need. You are responsible for all interest that accrues on the loan. Repayment begins six months after you leave school or drop below half-time.

Additional Loan Options

Students or parents who need to secure additional school funding (after exhausting eligibility for Subsidized and Unsubsidized loans) can seek credit approval through private loans or the Direct PLUS Loan for Parents (dependent students only). The interest rate, fees, and other terms of loans that are offered to you can vary significantly between lenders. Students are encouraged to “shop around” to find the best terms available to them. 

Private loans are available through various sources, including banks, credit unions, or colleges and universities. You must inquire or apply with each of these lenders to determine the terms that are available to you. If you have concerns about a lender’s practices, you can submit a complaint to the Consumer Financial Protection Bureau at https://www.consumerfinance.gov. 

Direct PLUS Loan for Parents are federal loans available to parents of dependent undergraduate students. Credit approval is required. If a parent is not approved, the student may be able to borrow additional funds under the Direct Unsubsidized Loan program. Borrowing under this program is limited to $20,000 per year, and $65,000 total, for each undergraduate student. An origination fee is automatically deducted from the amount borrowed, and parents should account for this fee when determining the amount they need to borrow. View current Direct PLUS Loan interest rates and fees.

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Types of Repayment Plans

If you take out federal student loans, you’ll have multiple options for repayment plans:

  • Fixed Plan. Your monthly payments will stay the same until your loan is paid off.
  • Graduated Plan. Monthly payments will increase at specified times, usually every two years.
  • Income-Based Plan. Your monthly payment will be a percentage of your income.

Which One Is Right?

There is no one best repayment plan. The fixed plan is the default for federal loan repayment, but don’t take that as a recommendation. It’s an automatic pre-selection that doesn’t take your situation into account.

A graduated payment plan makes sense if you can count on your income rising steadily during your repayment period. An income-based plan might be best if you don’t plan to enter a high-paying job. It also provides some buffer if you don’t land a job right away, and your loan might be forgiven after a specified time. A shorter repayment plan will cost more each month for now but will save you money in the long term.

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