This comprehensive guide to student loans is a useful asset for prospective college students of all ages. Learn about the changing nature of student loans, what to expect from a lender, what path is best for you as a student, and how to minimize and plan for debt as much as possible. We will discuss the different types of loans available to borrowers, the repayment plans available after college is complete, and how to get your loans out of default through consolidation and rehabilitation.

Current State of Student Debt

There is much talk in Washington and across the US of total student loan reform. This has many people on edge, wondering if their funds will be cut short before they can finish their degree, or worried that they will have to now cover tuition with high taxes. In 2016, student debt became known as the 1.3 Trillion dollar crisis, behind only mortgage debt. Before the 2016 election, there was a push for “free college,” but now most time, energy, and bills are focused on legislation to shorten repayment periods, lower interest rates and consolidate the lenders into one organization instead of many. According to statistics from the New York Federal Reserve, there are more than 44 million people borrowing currently. The average student graduating now has $37,172 in student loan debt.

On the horizon

Currently, there is legislation proposed to alter the terms of repayment for student loan users. The law has stated for some time that the debtor cannot charge payments that are more than 10% of the borrowers income, but after paying 10% of their income for 20 years, the student loans will be forgiven. The Trump Administration has proposed new legislation that would slightly raise the amount of money being taken per month and substantially reduce the time in which the money would be collected. The new proposal is for the standard repayment plan to take 12.5% of income, or an eighth of all earnings.

Through this proposal, payments would end after only 15 years, at which time, all the remaining student loan would be forgiven. This is probably to the benefit of both lenders and debtors. In the end, debtors will likely pay less money. This is especially true because the term of their repayment includes fewer of the highest-earning years. However, student loan issuing organizations will probably make a more consistent profit in the long run. It is impossible to deny that losing a full eighth of one’s income will have some major effect on one’s lifestyle. However, the repayment period has been reduced by a full quarter. This is certainly a benefit worth considering.

In a similar vein, the Trump Administration and education secretary Betsy DeVos has been considering methods to consolidate and streamline the student loan process. DeVos proposed that all student loan issuing agencies be consolidated into one large Private Bank, which would take over the task of Student Loans Collections. This proposal was found unsuitable, and has been withdrawn, but it does carry it with it certain possible benefits. Interest rates might go down and service might improve.

Similar proposals relating to fixed interest rates and variable interest rates are introduced as legislation and progress, uncertainly, towards implementation. Government works at a glacial pace, and the constant barrage of headlines give the illusion that enormous things are happening every day. This is not the case with legislation. It is submitted, edited, reviewed, revised and amended. by the time the specific rules reach the consumer, the varying layers of interpretation and implementation create a situation that is incredibly difficult to predict. That is why it is generally better to proceed slowly. It is virtually certain that you will be better off paying your student loans earlier. Over time, one can reasonably expect that the American laws will evolve to be less harsh for student loan debtors. Payments will probably become easier, interest rates will probably improve, and more forgiveness programs will be constructed.

Do Your Research Before You Apply for Loans!

Don’t go into this blind. Read as much as possible about your options. Think of it as practice for the hours of research you will inevitably have to do when you start or finish your degree! Before you take out a loan, it is wise to learn about all of the different interest rates associated with each, as well as your eligibility for different grants. Write up a loose budget proposal, just to get an idea for how things will go and what to expect, along with an expected time line to graduate.

One unfortunate dynamic that many professors and advisers (academic and financial) witness is students not putting their 100% effort into the college experience. A good way to avoid this failure is to have a solid idea of what line of study you want to pursue before enrolling. If you choose a major and decided to transfer later, this could cost you or your family big bucks. Have 2 or 3 first choices for colleges to enroll in before applying for aid unless you are sure you have a guaranteed acceptance into one.

Loans and Grants

After doing your budget, you can decide how much, if any, you or your family can contribute to the cost. Gather all of your identification, residency, and income information. A digital copy of your tax return from your tax service provider is a great way to avoid having to fill out endless financial questions on your applications. (Check out our guide on grants and loans available to college students).


The next step to getting student aid is to complete the FAFSA, short for the Free Application for Federal Student Aid. Get familiar with this website as you will have to fill out this application every year that you plan to take classes. You must do this every year between the months of October and June to be considered for yearly funding. Fill out the FAFSA honestly and thoroughly. Choose the option to upload your tax return into the FAFSA system when prompted in the income section. Most people are eligible for financial aid, so don’t stress out too much.

Pell Grant For Low Income Undergraduates

It is smart to exhaust any grant possibilities that you may qualify for before taking out high interest loans. The Pell Grant is a great way to get started with your college career if you have not earned a Bachelor’s Degree yet. The current maximum Federal Pell Grant amount is $5,920 a year. Getting the entire amount depends on:

  • Whether you are attending class full time (over 12 credit hours) or part time (under 12 credit hours)
  • Whether you plan to attend for the full year school year or just for a semester.
  • Whether you have financial need (determined by your FAFSA)
  • The cost of attendance at your University

Unsubsidized versus Subsidized Loans, “Stafford Loans”

Know the Difference, or pay the price! Most people qualify for one loan or the other or both. You must be enrolled at least half time to qualify. Your school must participate in the Direct Loan Program, and you must be enrolled in a program that produces a certificate or degree when completed.

Direct Subsidized Loan

Direct Subsidized Loans have better terms than Direct Unsubsidized and are only given to undergraduate students who can show financial need. Your college sets the limit on the amount you can borrow, and that amount cannot exceed your financial need. The United States Department of Education pays the interest on your Direct Subsidized Loan when you are enrolled in school at least half time (6 credit hours), during your deferment period (the six months after you graduate), and during any later deferments you may arrange later through your provider.

Direct Unsubsidized Loan

Direct Unsubsidized Loans are available to both undergraduates, graduates, and professional degree students. You do not have to demonstrate financial need to qualify for one. Like the subsidized loan, your college determines how much you can borrow depending on your cost of attendance and your overall financial aid package. Unlike the subsidized loan, you are responsible for paying ALL of the interest during all of the periods. If you do not pay the interest while in college, it will accrue and be added to your principle value.


FFEL or the Federal Family Education Loan is sometimes referred to as the only federally guaranteed loan, and it is the popular choice for many parents applying with their children. However, only about three quarters of all colleges participate in the FFEL program. You can have your choice of lenders through the FFEL, while this is not so in the Direct Loan program. Both the FFEL and Direct Loan Programs offer Stafford, PLUS, and Consolidation Loans.

Repayment plans

There are a number of repayment plan options that should be thoroughly researched and planned for before accepting your loans.

The Standard Repayment Plan

The Standard Plan is the basic repayment plan for the Direct and FFEL loans. In this plan your payments are fixed, meaning that they stay the same. You make payments for an average of ten years unless you later get your loans consolidated, in which case the terms change. In this plan your payments will be higher than in the other plans, but it will save you money in the long run since it will reduce your interest payments by paying your debt in the shortest amount of time possible. If you do not take initiative to choose another plan, this is the one that will be assigned to you. You can change your payment plan at anytime by contacting your provider.

The Graduated Repayment Plan

The Graduated Repayment Plan begins with low payment amounts and then gradually increases every two years for a period of ten years. Any loan that you choose to consolidate will no longer qualify. Under this plan, as a general rule, your payments can never be less than the amount of your interest payments and can never be more than three times larger other loan payments.

The Extended Repayment Plan

This plan allows you to repay your loans over an extended period of up to 25 years, instead of the usual 10-15 years. In order to qualify for this plan you must have no outstanding balances from the time you obtained your Direct or FFEL Loans until present. You also must have more than $30,000 in debt to qualify. To be more clear, if you have $10,000 of debt from the FFEL program and $40,000 from the Direct program, only your Direct Loan debt will qualify for this plan.

Income-driven Repayment Plan

If you feel that your federal student loan payments are too high when compared to your income, the Income-driven Repayment Plan may be helpful to you. The majority of student loans qualify for one or more of the income-driven repayment plans. Note: if your income vs. expenditure is low enough, your may even qualify for payments as low as $0 per month.

This plan exists to help make your payments more affordable based on the size of your family and your overall income. There are four different versions of this plan that you need to be aware of. Each should be researched thoroughly before a choice is made. The REPAYE and PAYE Plans are Pay As You Earn Repayment Plans. IBR is short for Income-Based Repayment Plan. ICR stands for Income-Contingent Repayment Plan. In all of these versions, your payment is a percentage of your discretionary income and that percentage varies between each plan. Defaulted loans do not qualify for any of the IDR plans.

Income-Sensitive Repayment Plan

In this plan your payments increase and decrease depending on your annual income for a maximum of ten years. This plan is helpful for people who need lower payments.

Stay in Close Contact with your Loan Provider

Not sure who owns your loans? Find out to avoid stress and confusion at The National Student Loan Data System (NSLDS). If you are having financial hardships after graduating, there are options to keep you out of default and preserve your credit score. Maintaining contact with your loan providers is your smartest move even if you are unable to make payments. Once you are in default, it makes things more complicated, but even that can be remedied. This may all sound intimidating, but it is important to note that the reason you are going to school is to potentially make more money doing something you love. Don’t let the loans intimidate you.

Getting Out of Default Through Loan Consolidation and Loan Rehabilitation

There is a surge of companies right now offering loan consolidation services. Don’t fall for the scam! It is very easy to do this on your own over the phone or online through your provider’s website.

Loan Consolidation

Consolidation is a great way to lower your interest rates and your monthly payments. It may also help you to avoid confusion since afterward you will no longer have 2-4 loan providers, but just one with one stable interest rate. After consolidation, the length of your repayment period will depend on the amount of your total debt. At anytime, you have the option to consolidate federal student loans into a Direct Consolidation Loan. It is basically taking out a single loan to pay for all of your smaller loans. To consolidate you must either make three voluntary and consecutive payments on-time or you must sign a new agreement to pay the new Direct Consolidation Loan under an income-driven repayment plan. If your loans are in default, the only way to consolidate is to include at least one other loan that is not in default. If all of your loans are delinquent, you cannot get out of default by consolidation. Your other options to get out of default are payment in full (which is not feasible for most people) or something called loan rehabilitation.

Note: For any of these plans, it is necessary to verify your income somehow, either through paycheck stubs or tax returns. If you are a parent who took out loans for your child’s education and now wish to consolidate, the only income-driven plan available to you is the ICR or Income-Contingent Repayment Plan.

Loan Rehabilitation

Loan Rehabilitation is another way to get your loans out of default. The other options being full payment of the entire loan or the consolidation method which we discussed above. To rehabilitate a loan, you must agree in writing to make payments for ten months for a total of nine payments. These payments need to be voluntary, on-time, and consecutive. You need to negotiate an amount with your loan provider that is affordable based on your income. This amount is usually 15% of your annual income unless there are special circumstances. Depending on your annual income, this amount could actually be as low as $5.

Remember, you can only rehabilitate a loan once! So don’t mess up.

All those pesky problems that come from having loans in default will vanish after just nine months of dependable payments. Once your loans are out of default, you then have the option to choose from a number of more reasonable repayment plans for your personal situation. If your wages or tax returns were being garnished, that will stop once your loan is rehabilitated. You will also be eligible at that point to take out more student loans and finish your degree if your plan is to go back to school. Rehabilitating delinquent loans to take out more loans to finish a degree may sound risky, but if you can make more money with that degree, it may be a smart risk for you to take.

Photo by Hans Splinter.