2-Minute Money Manager: How Do Student Loans Work?

Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about student loans; specifically, the best ways to repay them and how the different types work.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “How to Get Free Help With Your Student Loans” and “5 Ways to Pay Off Your Loans Faster.” You can also go to the search at the top of this page, put in the words “student loan” and find information on just about everything relating to this topic.

If you need help with student loan debt, click here. And if you need anything from a better credit card to a mortgage, be sure and visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.

Today’s question comes to us from Anonymous, and it’s a simple one:

“How do student loans work?”

Well, Anonymous, I’ve got three things for you.

Thing No. 1: The devastating amount of student debt

Do you know how much people owe on student loans in America? Forty-four million borrowers owe a collective $1.5 trillion. This is a huge amount of debt, and it’s burdening a huge number of people.

If you’re seeing a lot in the media about student debt, this is why. The student debt burden is literally reshaping our economy. For example, fewer people are buying houses because they can’t afford both a mortgage and their student loans.

Thing No. 2: The types of student loans

While these loans come in many varieties, there are basically only two types of federal student loans: direct subsidized and direct unsubsidized. They’re called “direct” because you’re borrowing money directly from the U.S. government. “Subsidized” means the government will pay your interest while you’re in school. “Unsubsidized” means you won’t have to pay the interest while you’re in school, but it’s accruing; the government’s not paying it for you.

To get a subsidized loan, you have to prove financial need. To get an unsubsidized loan, you don’t. You also don’t have to have good credit, nor do you have to fill out a long credit application. It’s basically automatic. While this is obviously good for students seeking loans, it’s also probably why we have so much student debt in this country.

A third kind of student loan is simply a private loan. In other words, you go to a bank or credit union and borrow money to pay for school. For these loans, you’ll fill out a typical loan application and have your credit checked.

There’s one final type of loan, the Plus Loan. I’m not going to go into those because this is a short answer. But simply put, these are for graduate students and parents borrowing to help their kids.

Thing No. 3: Getting out from under

I’ve heard from so many people burdened by so much debt. It’s depressing.

It’s not really their fault. The government’s saying, “Don’t worry about skyrocketing tuition costs! Here, take some money! Take as much as you want!” All well and good until it’s time to pay that money back. When you get out of school, that interest clock starts ticking.

So, for that reason, don’t ever borrow more than you absolutely need. Then, pay it back as quickly as you possibly can. The simplest way to do that is to pay extra every month. (You can learn more about repaying debt with articles like “8 Guaranteed Ways to Get Rid of Debt Fast.”)

There are programs that can help reduce your student loan payments. For example, with an income-driven repayment plan, you may not have to pay more than 10 percent of your available income to pay back your loans. (Read about that here.) That can make it easier to repay your loans, but it could also extend both the length of the loan and, ultimately, the interest you’ll pay on it.

There are also options for loan forgiveness, consolidation and forbearance if you’re having trouble. You can learn about those options here.

Bottom line? When it comes to student loans, borrow as little as possible and pay it back as quickly as possible.

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About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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