7 things to know about student loans

Nearly three-quarters of families rely on student loans to pay for higher education, according to the Urban Institute.

Borrowing for school can be confusing, especially for first-time students and families overwhelmed by the sheer amount of debt they're assuming.

However, it's at the start of the process that you need to learn what your options and obligations are, not years later when your credit score has tanked and you're buried in tens of thousands in education debt.

1. Federal student loans vs. private student loans
2. Subsidized vs unsubsidized loans
3. You don't have to accept the full funding amount
4. You may qualify for a grace period before repayment
5. There are a variety of repayment options
6. You can refinance your student loans
7. Always stay connected to your loan servicer

Educational loans are divided into federal student loans, which are funded by the Department of Education, and private student loans, which come from banks, credit unions, online lenders and other financial institutions.

Because they have more flexible credit and repayment requirements and more generous relief options, you should exhaust all your federal student loans before turning to private student loans to fund your education.

Here are the chief differences between the two:

Applying: You must submit the Free Application for Federal Student Aid (FAFSA) in order to qualify for federal student loans, along with other aid, like the need-based Pell Grant and work-study.

Interest rates: Federal loans have a fixed interest rate, while private ones can be fixed or variable and require much better credit. As a result, borrowers have to undergo a credit check and often need a co-signer.

Borrowing limits: Depending on your year and dependency status, federal student loans are capped at between $5,500 and $12,500 annually. Private loans, however, can be for as much as 100% of the certified cost of attendance at an approved school.

Repayment terms: Federal student loans are set up with standard monthly payments over a 10-year term. You can enroll in an extended repayment plan, with payments that increase over time, or an income-driven repayment (IDR) program, which caps your monthly bill based on your salary. It also extends your term to up to 25 years and forgives any balance that's left after that. 

Private student loans usually have terms of between 5 and 15 years, and rarely offer IDR options.

When repayment starts: Borrowers don't have to start repaying federal loans until they graduate or their enrollment status drops to below half-time. With private loans, you may be expected to make full, interest-only or flat-amount payments while still enrolled.

Relief options: Federal student loans enjoy protections you don't usually get with private loans, like income-driven repayment plans, deferment, forbearance and loan forgiveness or discharge. While some private lenders allow deferment and forbearance, the options are much more short-term.

All student loans charge interest. The difference between subsidized and unsubsidized loans is when that interest starts accruing.

With federal direct subsidized loans, you only start accruing interest after you've graduated or dropped below half-time enrollment or if your loans are in deferment.

Unsubsidized loans are not based on financial need and interest starts accruing while you're still in school and during any deferment or grace periods.

While you may be awarded a large amount of student loan funding, you don't have to accept every dollar offered. In fact, most students probably shouldn't.

If you're applying for federal loans through FAFSA, you'll also be notified of any grants you're eligible for. You may also qualify for institutional aid from your university, like scholarships. If you don't qualify for scholarships from your university, you can also seek scholarship funding externally.

Also consider taking on part-time work on campus and using some of that income toward tuition costs. Every little bit helps you avoid taking on a larger student loan debt burden.

If you have subsidized, unsubsidized or Federal Family Education Loans, you're entitled to a six-month grace period before you have to start making monthly payments. (Federal Perkins Loan borrowers receive a nine-month grace period.)

This optional pause is intended to give you time to get your finances in order. Make sure you're set up with your student loan servicer and that they have your correct contact information. You should also double-check how much you owe: If you decide to change the terms of your repayment plan, this is a good time to reach out to your loan servicer about your options.

The grace period begins after you graduate, leave school or drop below half-time enrollment. While you're not required to make payments, interest will still accrue on unsubsidized loans. 

If you have federal student loans, there are different repayment plans to choose from.

Standard repayment plan

• Monthly payments are fixed, equal amounts and intended to be paid off within 10 years. (Consolidation loans may take as long as 30 years.)
• Not eligible for Public Student Loan Forgiveness (PSLF), a program available to borrowers working full-time in public service.

Graduated repayment plan

• This plan lets you start with lower monthly payments that increase slightly every two years.
• The monthly payment amounts and the increases are adjusted in a way that ensures you'll pay off the balance within 10 years.
• Not eligible for PSLF

Extended repayment plan

• For borrowers with a balance above $30,000.
• Monthly payment amounts are structured in a way that should allow you to pay off the balance in 25 years.
• Not eligible for PSLF

Revised pay as you earn plan

• Monthly payments equal to 10% of your discretionary income, based on salary and family size.
• Outstanding balance forgiven after 20 years for loans for undergraduate study or 25 years for loans for graduate programs.
• You may be taxed on the forgiven amount
• Not eligible for PSLF
• Payments are recalculated each year, so you'll have to resubmit your information annually, even if nothing has changed.

Pay as you earn plan

• Monthly payments equivalent to 10% of discretionary income, but less than what you would pay under the Standard Repayment Plan.
• Payments are recalculated each year to account for any changes to your income or family size.
• Not eligible for PSLF.

Income-based repayment plan

• Monthly payments equivalent to either 10 or 15% of discretionary income, but less than what you would pay under the Standard Repayment Plan.
• To be eligible, your debt balance must be high relative to your income.
• Any outstanding balance is forgiven after 20 or 25 years (depending on when you first took out loans).
• You may be taxed on the forgiven amount

Income-contingent repayment plan

• Monthly payments of either 20% of your discretionary income or the amount you'd pay with a fixed plan over 12 years, whichever is less.
• Any outstanding balance is forgiven after 25 years
• You may be taxed on the forgiven amount
• This repayment plan qualifies for PSLF.

Income-sensitive repayment plan

• Only available to borrowers with loans through the Federal Family Education Loan (FFEL) Program.
• Monthly payments based on income and structured so that loan is paid off within 15 years.

The interest on your student loans can eat into your monthly payments and make it feel like you're taking one step forward and two steps back.

Refinancing your student loans can allow you to lower your rate or switch from a variable rate loan to a fixed-rate one. Other reasons to refinance include:

• To change loan term: Extending your term can make monthly payments more affordable, while refinancing with a shorter term will save you money that would otherwise go toward interest
• To change lenders: If you're unhappy with your lender's repayment options, customer service or relief options, you can switch to a lender that better meets your needs.
• To consolidate payments: You can simplify your finances by consolidating multiple private and/or federal student loans into a single monthly payment.
• To release a co-signer: If you had a co-signer on your loans, you may be able to free them from their financial obligation if you meet a new lender's requirements.

Whether you have federal or private student loans, it's important to maintain contact with the company that's managing your loan so you can keep tabs on your balance, track your progress and reach out if there's a change in your personal information or financial status.

There are only six servicers that manage federal student loans for the U.S. Department of Education, overseeing payment processing and other features. They are:

• Aidvantage
• EdFinancial
• MOHELA
• Nelnet
• ECSI
• Granite State Management & Resources

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