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A Short, Handy Guide to Federal Student Loans

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Student loans are about as complicated as they are common — and they’re very common. But before you can hope to understand the detailed terms and many repayment options you may have on a student loan, you need to know the basics. Here are answers to some of the most frequently asked questions about student loans.

How Much Student Loan Debt Do Americans Have?

More than 44 million Americans have student loans, according to 2016 data from the Federal Reserve Bank of New York, and borrowers owe the vast majority of their $1.4 trillion in outstanding student loan debt to the government.

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    What Are Federal Student Loans?

    A federal student loan is an education loan funded by the government. The U.S. Department of Education offered a variety of student loan programs over the last few decades. In some cases, the Education Department is your lender, and sometimes your lender is your school. You may also have a loan that you borrowed from a private lender insured by the federal government. You can find out what federal student loans you have and where to pay them by logging into the My Federal Student Aid website.

    Your particular college or university may offer you federal student loans as part of your financial aid package. In order to get a federal student loan, you must fill out the Free Application for Federal Student Aid (FAFSA) each year. Most federal loans do not require a credit check (parent PLUS loans do), and many do not require you to exhibit a significant need for financial aid.

    What Is a Private Student Loan?

    If you have a private student loan, that means you borrowed money from a bank, credit union or other entity whose funds are not backed by the federal government. You will undergo a credit check if you apply for a private student loan, so if you don’t have good credit or any credit history (as is often the case with college students), you will need someone with good credit to cosign your loan. Loan terms and repayment options vary widely by lender and borrower.

    How Do Student Loans Relate to Your Credit Scores?

    You do not need to have credit or good credit to get a federal student loan, unless you are a parent borrower, but you will need good credit to get a private student loan. As with other loans, applying for a private student loan will result in a hard inquiry on your credit reports, which will have a slightly negative effect on your credit scores for a short period of time.

    Student loans mainly affect your credit in terms of how you repay them. Make your loan payments on time, and your student loans can help you build good credit. Missing your student loan payments can severely damage your credit scores, as can any debt collection activity that occurs if you’re seriously delinquent on a loan.

    Federal student loan borrowers can choose from and apply for a variety of repayment plans in order to make their monthly loan payments more affordable, so if you’re worried about being able to meet your loan obligations under the standard repayment plan (fixed, monthly payments over the course of 10 years), immediately talk to your loan servicer about your options. (You can see how your student loans are affecting your credit by reviewing a free snapshot of your credit report on

    How Does Interest on Federal Student Loans Work?

    Interest accrues on your student loans as soon as they’re disbursed until they’re repaid (the interest rate on your loan depends on what type of loan you have and when it was borrowed). Because you don’t enter loan repayment until after you graduate, leave school or drop below half-time enrollment, your loan balance may have grown substantially by the time you start paying it down. If you have a subsidized student loan, the government will pay interest on your loans while you’re in school or on a deferment plan. Borrowers with unsubsidized student loans are responsible for the interest on their loans.

    The interest on your student loans is calculated using a simple daily interest formula. After your grace period (time between leaving school and entering repayment) or a period of deferment or forbearance, any interest accrued on your loan may be added to the principal balance, meaning you’ll have to pay interest on that.

    You may be able to consolidate your federal loans to a fixed interest rate that is the average of the interest rates on the loans you’re consolidating. The interest rate will be rounded up to the nearest eighth of 1%. Your student loan servicer may also offer a 0.25% interest rate deduction if you enroll in autopay. Otherwise, you’re pretty much stuck with the interest rate you started with, unless you refinance with a private lender.

    What Is the Student Loan Forgiveness Program?

    Working in certain fields for a specific period of time may qualify you for public service student loan forgiveness. Some repayment programs, like Income-Based Repayment and Pay As You Earn, allow you to apply for loan forgiveness on any remaining loan balances after 20 to 25 years of on-time payments.

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