A student loan is comprised of funds the federal government or private banking institution lends to a borrower to pay for their college education. The money can go toward any higher education expense including tuition, books, fees and living expenses. Before borrowers get a student loan, a simple calculation can help estimate what the payments will be.
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The student loan is usually paid back in monthly installments and the average monthly debt students pay often depends on the industry. Private health care and social assistance industries pay the most with their loans averaging about $685 per month.
Borrowers take out student loans to offset the rising cost of college tuition. Even with saving money, most people can’t afford to outright pay the tens of thousands of dollars needed for a college education. Getting a student loan helps ease the financial burden.
There are two types of student loans. Federal loans are most popular among borrowers because they’re easier to qualify for and offer the most funding with flexible repayment terms. Many borrowers use private student loans to help fill in the gaps financially after borrowing the maximum allowed from the federal government. However, interest rates will be higher on private student loans.
How borrowers get a student loan for their college education:
- Apply to colleges they're interested in attending and get an idea of the tuition cost. Borrowers should determine how much they have in their savings account to go toward their education. The balance will be how much they need to get in student loans.
- Gather documents needed to apply for a federal student loan. This includes bank statements, tax returns and W-2 forms.
- Complete a student loan application from the federal government. The Free Application for Federal Student Aid (FAFSA) can be accessed online. Prospective students can apply via their computers or even mobile devices by downloading the app. It’ll take about 45 minutes.
- After federal loans kick in, and there’s still a balance, they should compare interest rates and apply for a private student loan from a bank, credit union or lending institution. Private lenders will base the interest rate on their credit score and any income they may have.
Student loan repayment calculations:
When it comes time to repaying student loans, borrowers can use this quick calculation to get an idea of what their monthly payments will look like. Most student loan calculators will ask to input the balance of the loan, terms of the repayment in years, and the interest rate. For example:
Loan amount: $45,000
Terms: 10 years
Interest rate: 6 percent
Monthly payment = $499.59 month
If repaying the loan amounts to more than the borrower can handle, the government offers Income-Driven Repayment (IDR) plans. These plans will result in lower payments, based on their current income and family size after graduation. It's important to enter the correct income as the government has claimed that a number of borrowers are under-reporting their income, leaving taxpayers to bear the costs.