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12.1. Federal vs. Private Loans
Loans come from two main sources: the federal government and private lenders (banks, credit unions, or companies). Each has pros and cons.
Federal Loans
Source: U.S. Department of Education, accessed via the FAFSA.
Types:
Direct Subsidized: For undergrads with financial need; the government pays interest while you’re in school and during a six-month grace period after graduation.
Direct Unsubsidized: For undergrads and grads, no need required; interest accrues from day one.
PLUS Loans: For parents or grad students, higher limits but with credit checks.
Pros: Fixed interest rates, flexible repayment plans, no credit check for most … Read more...
12.2. Interest Rates and Terms
Interest is the cost of borrowing—it’s what makes loans grow over time. Understanding it is key to managing debt.
Federal Loan Rates:
Fixed for the life of the loan—e.g., 6.53% for undergrad Direct Loans in 2025–2026 (rates reset annually).
Subsidized loans: No interest while in school; unsubsidized and PLUS accrue immediately.
Terms: Standard repayment is 10 years, but plans can extend to 30.
Private Loan Rates:
Fixed (e.g., 5%–12%) or variable (e.g., 3%–15%, tied to market rates like LIBOR or SOFR).
Vary by credit score—excellent credit gets lower rates; poor credit or a co-signer means higher.
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Repaying loans doesn’t have to be a one-size-fits-all slog. Federal loans offer flexibility; private loans less so.
Federal Repayment Plans:
Standard: Fixed payments over 10 years—highest monthly cost, lowest total interest.
Graduated: Payments start low and rise every two years—good if your income will grow.
Extended: Lower payments over 25 years—requires $30,000+ in loans.
Income-Driven Plans:
Income-Based Repayment (IBR): Caps payments at 10%–15% of discretionary income, forgiven after 20–25 years.
Pay As You Earn (PAYE): 10% of income, 20-year forgiveness—stricter eligibility.
Revised Pay As You Earn (REPAYE): 10% of income, 20–25 years, open to all borrowers.
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12.4. Loan Forgiveness Programs
Forgiveness wipes out remaining debt after meeting conditions—a lifeline for some borrowers. Here’s what’s out there:
Public Service Loan Forgiveness (PSLF):
Who: Federal loan borrowers working full-time for government or nonprofits (e.g., teachers, nurses, firefighters).
How: Make 120 qualifying payments (10 years) under an income-driven plan.
Result: Balance forgiven, tax-free—e.g., a $50,000 loan could vanish after 10 years.
Catch: Certify employment yearly; mistakes can delay eligibility.
Teacher Loan Forgiveness:
Who: Teachers in low-income schools for 5 consecutive years.
How: Up to $17,500 forgiven on Direct or FFEL loans (less for non-math/science teachers).
Catch: Must teach full-time … Read more...
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