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A Lesson in Student Loans

Episode 52

A Lesson in Student Loans

Posted July 5, 2024 at 11:00 am
Cassidy Clement , Kate Wood
Interactive Brokers , NerdWallet

Student Loans are a common topic in the United States when discussing educational advancement. It can be overwhelming when reviewing all the information. There can be interest, loan types, and many other facets that need to be taken into consideration. Kate Wood, Lending Expert at NerdWallet joins Cassidy Clement, IBKR’s Senior Manager of SEO and Content to discuss.

Summary – Cents of Security Podcasts Ep. 52

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement 

Welcome back to the Cents of Security podcast. I’m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers. Today, I’m your host for our podcast and our guest is Kate Wood, Lending Expert for NerdWallet.  

Student loans are a common topic in the United States when discussing educational advancement. It can be overwhelming when reviewing all the information that comes with it.  

There can be interest, loan types and many other facets that need to be taken into consideration. Today we are going to discuss the basics to give listeners a foundational view on this matter. Welcome to the program, Kate. 

Kate Wood 

Thanks so much for having me.  

Cassidy Clement 

Sure! So since this is your first episode, why don’t you tell the listeners a little bit about your background in the industry and what you write about at NerdWallet? 

Kate Wood 

Sure. So I have been a writer at NerdWallet for almost five years now. I’m really passionate about helping people understand their financial options. Particularly how folks can get access to things like government programs. These can be really helpful, but often are sort of layered and bureaucracy forms and terminology that’s unfamiliar. So they’re just hard for people to figure out, and that’s something that I am personally really invested in. 

Cassidy Clement 

Well, you covered the exact part of it. There’s a lot of bureaucracy around student loans. There’s a ton of information and a lot of people get just kind of scared of the topic or they don’t want to delve too deep because it can seem really daunting. And there’s also a lot of math and financial backgrounds sometimes involved, which can also be topic that has a lot of anxiety around it, especially when some students are first generation college students and they don’t have someone in their family to help guide them along that line and kind of understand some of this terminology.  

So to kick off the topic, the most basic question would be what are student loans and what can they be used for? Most people are going to say of course it’s in the word. Student loans. Use it to pay for being a student, education, etcetera. But there were a lot of things in my research that I didn’t realize can be used for student loans. So if you can give the listeners a little bit of an understanding of the basic definition and then also what it could be applied for.  

Kate Wood 

Sure. I mean, like you said, student loans are pretty much money for education that you have to pay back, right? It’s a loan. So you’re getting the money, but then you are going to have to pay it back later. People do tend to kind of make student loans almost smaller than they are and think of them as just like, oh, this is money you’re getting that you can use to pay for tuition or fees. But really you can use student loans to cover all kinds of education related expenses.  

So that includes things like textbooks and materials, a laptop or desktop computer that you use for school on or off campus housing costs like getting a like a bus pass or a parking permit.  

There are a ton of associated costs that go into being a student and student loans are something that could help you pay for really any of those costs. 

Cassidy Clement 

So really you can have all these different costs that are associated with whatever way that your education is going to be advanced. And as you mentioned, there can be either some type of a lump sum that you pay them back in or maybe in an installment. Most people are usually familiar with like installment.  

You have your student loan payments every month or something like that. And you, of course, have to pay it back over time and pay interest, but there can be several different types of loans that are under the umbrella of student loans.  

And if you’ve gone to that financial aid meeting at your college or your high school, you’ve probably heard the buzzwords of private versus public loans, and that comes with the subsidized-unsubsidized or having to do with the interest rate that’s associated.  

What are the bullet points for what these different loans are? And how they differ with maybe their cost overtime and how you pay them back?  

Kate Wood 

Sure. So it’s pretty big, but let’s try to break it down into kind of digestible chunks.  

So there are two sort of main types of student loans as you mentioned. Private loans and then public loans, which are more commonly referred to as Federal student loans. So the really key difference is just where do these loans come from? So, Federal student loans are loans that come from the Federal government. Private student loans are student loans that come from individual lenders, and so that can include places that you think of, you know, borrowing money from like banks. But there are also non-bank lenders that offer student loans.  

So there are a lot of different sources of private loans. Under the sort of auspices of Federal loans, there are direct subsidized loans and direct unsubsidized loans. The difference between those is that these subsidized loans don’t accrue interest while you’re still in school. So the loan amount is just sitting there waiting for you until you’re done with school.  

Direct unsubsidized loans, which are more common, build up interest while you’re in school. Once you finish school, that interest amount is capitalized, so it’s added to the amount of the loan. Then you move forward with repayment. So to qualify for a direct subsidized loan, you are going to have to demonstrate financial need. And also there are Federal loans that are specifically for graduate students and specifically for parents. 

Interest rates are a really key difference between these loan types. So with all types of Federal student loans, in order to apply for them, you just do the FAFSA, which is the Free Application for Federal Student Aid. I’m sure we’ll talk more about it in a minute, but pretty much, you know, you fill out the FAFSA and then whatever student loans you get at the end of that, the government just sets interest rates for the given calendar year. So whatever year you get the loan in, you lock in that interest rate. It’s like nothing about you. It’s nothing personal, right? It’s just like this is when that loan started. This is what your interest rate is going to be. 

Private student loans are much more similar to other types of loans that you might get in your life, like an auto loan or a personal loan. So you’re applying with an individual lender and it’s going to include steps like a credit check, right? So that is one, going to show up on your credit report, but also for someone who doesn’t yet have an established credit history, that can be a real stumbling block to qualifying for a private student loan.  

That person might need to work with a co-signer. But you know, let’s assume that you do qualify and you are able to get a private student loan, your interest rate is going to depend not on when you got the loan, but is going to depend very much on you.  

If you’re a borrower who has a higher credit score, if you have less debt, you have solid finances, you’re likely to qualify for a lower interest rate than someone who has a lower credit score who’s carrying more debt.  

Unlike with Federal loans, where you just do one application, it covers everything. With private student loans, you would want to research different lenders, compare the rate quotes that you’re getting, how much they might be able to let you borrow. It’s a lot more leg work on your part to compare everything. Also, generally, private student loans tend to have higher interest ratest than Federal loans. 

Cassidy Clement 

So when it comes to these loans, how does one apply for student loans? And are there certain application requirements? 

Kate Wood 

Well, I mentioned briefly the FAFSA, which is the free application for Federal student aid. That is really your starting point when it comes to getting money for college. And in fact, a lot of colleges and universities and also many states that have college assistance require you to fill out the FAFSA if you want to be considered for any financial assistance, so that really gets you started on the whole process because the FAFSA makes you eligible for Federal money and also for state and college or university specific aid, and that includes student loans.  

But it also includes a lot of different types of free money for college. So things like scholarships, grants, programs like work study. Money that you don’t need to pay back. And when you’re thinking about, how am I going to pay for college? Start with the money that you don’t need to pay back, right? That’s just funding that you’re getting in order to go to school and that you don’t have to deal with later.  

The FAFSA is, as the name implies, free to fill out. It’s filled out online. Students fill out parts of it, and their parents or guardians fill out other parts. There aren’t any particular qualifications or anything like that to fill out the FAFSA. Really anyone can fill it out. 

And you know, unfortunately, there are folks who think, oh, you know, but I’m not going to get anything. It’s not worth it to fill out the FAFSA. It’s really just a couple hours of your time to go through and fill it out. And you might honestly be surprised what you’re able to get because again, anyone can do it. There aren’t any particular requirements.  

There are some colleges and universities that require a different form for financial assistance that’s called the CSS Profile. It takes into account some information that the FAFSA doesn’t cover. And unlike the FAFSA, it’s not free.  

If you have a household income that’s under $100,000, you can apply to get a waiver for the CSS Profile cost, but if not, you’re going to pay $25.00 to complete the form and get it sent to one school. And then they charge you $16.00 a pop to get it sent to other institutions. 

With private student loans, there’s not a cost to apply, but again, you’re doing the leg work of researching different lenders and then going to them and usually, again, applying online, but it’s much more like applying for another type of loan where it’s very much focused on just your financial information. You’re agreeing to a hard credit check, which is not something that’s part of the FAFSA or these other forms, and they’re checking into your financial background. 

Cassidy Clement 

It’s important to also remember how much you have to have a good document or record keeping for all of this information as the time comes up. Because I remember when I would fill out my FAFSA, I think every year you would have to do it, you have to have tax returns, you have to have documentation on if you live at home, the parent that you live with, all of this information and it comes by fast. 

Every year you have to fill this out and make sure that you have a way to pay for your education and it may catch some people by surprise. I’ve filled out both the FAFSA and the CSS Profile and it was a while ago when I did it, but I remember them asking for a lot of information that I didn’t have at my fingertips that I would always have to say, even go back and eventually find the information somewhere in an e-mail or around the house somewhere.  

But you know, we talked about the different types of loans, how you can apply for them. But now let’s talk a little bit about paying them off. 

So, in the sense of now we’ve gotten there, we got the degree. How is somebody normally paying off these student loans and how quickly does it need to happen? Not how quickly can you make it happen, but how quickly does it need to happen? 

Kate Wood 

So there’s actually like a whole digression I could go on about the tax information because that’s with the new FAFSA that they launched this year. That’s something that they’re actually trying to remedy. That the new FAFSA form actually pulls in information directly from the IRS. So if you filed taxes in the previous year, if your parents or guardians filed taxes, it will pull in that information directly. And so you no longer will need to look and find all of that stuff. There’s also many fewer questions than you would probably remember from when you filled out the FAFSA. 

Cassidy Clement 

Music to my ears.  

Kate Wood 

But yes, so at the other end of everything, right, when you are leaving school, one of the things you are unfortunately looking forward to is student loan repayment. So all Federal loans have a grace period of six months after you leave school before repayment starts. 

Most private loans will have that as well, but that’s not always the case. In fact, some private loans might even require you to make payments while you are still in school, so this is another really big consideration.  

That six month period while you’re not repaying is a really good time to review your different repayment options and make sure that you’re choosing the right one for you. With private loans, that’s probably something that you selected years ago when you took out the loan, because they’re going to show you different interest rates, different terms, different monthly payment schedules.  

And at the time that you’re picking it, you don’t necessarily know what your income is going to be four or five years from that time so hard to say whether you made the right choice for you, so that’s something where you might want to follow up with the lender and say, OK, wait, can we talk about my repayment options. 

With Federal loans, the default is a standard 10-year repayment plan. That’s what everyone kind of automatically gets put into. But you do have different repayment options. One that is particularly popular are the different income driven repayment plans or IDRs.  

So with IDRs, your monthly payment amount isn’t tied to the amount of your loan. It’s tied to how much money you’re making. So you know if you’re right out of school and your income is relatively low, making those payments is really a struggle for you. If you chose to go on to an IDR, your monthly payment is lowered to suit your income.  

However, the loans term is extended so it goes to 20 years for Undergraduate loans or 25 years for Graduate School loans. So you are paying significantly more interest because you have the loan for that much longer, but your payments are much more manageable.  

Also, the different IDR plans are tied in with student loan forgiveness, which is a really hot topic, right? So with the standard IDR plans, when you hit that 20 years or 25 years for Graduate School, after that time, any remaining loan balance is forgiven. And depending on the IDR plan that you’re on and the amount of your undergraduate loans, you could actually potentially be eligible for forgiveness even sooner than that. 

 This is another really key distinction, though, between private student loans and Federal student loans. Only Federal student loans are eligible for these programs. So if you are using private student loans or if say you refinance your loans into a private student loan, you are losing that eligibility for student loan forgiveness and other Federal programs like that. 

Cassidy Clement 

You mentioned a lot of different details and caveats per the loan type that you have and the term time, I guess you could say, associated with the loan that gets taken out.  

So when faced with all these options, most students, at least in America, when they go to undergrad, you’re 17 or 18 years old. It’s a lot to digest.  

So in your eyes, as somebody who looks at this information all the time, what are some questions that students should ask themselves when reviewing these options for student loans? 

Kate Wood 

Basically, so you want to start off with the FAFSA, right? This is sort of the cornerstone of financial aid in the United. States. It’s really like the backbone of finding ways to pay for college, right? 

And so through the FAFSA, you’re going to get access to many, many, many of your avenues for free money, right? So grants, scholarships, work study, things that you do not have to pay back.  

You could also potentially look for other scholarship opportunities that you could research on your own that are outside of the FAFSA, right? So things like smaller organizations, sometimes community organizations aren’t tied into info like that. It might be something more where it’s like you write an essay or do like a one-off application to take care of that. 

But really, free money first, right? We want to go for that first. Then, Federal student loans. And again, that still is just coming from the FAFSA, right? So with the FAFSA, what money is the government willing to offer you?  

Then really at the end is when you would want to be looking to private student loans if you absolutely have to. You’ve got gaps that you need to fill in your funding for a couple of different reasons. One, private loans may have a higher interest rate. Like you were mentioning, say you are 17 or 18 years old, you probably don’t have much of a credit history or anything like that. You’re likely to need a parent to either take out those loans on your behalf or to be a cosigner or coborrower for you, right? So that’s a whole other issue with private student loans.  

And then again, when we’re looking at these different programs like student loan forgiveness, private loans aren’t eligible for them, so really, private loans are kind of your last resort when it comes to paying for school.  

For those who do have to turn to private loans because this is something that you know absolutely does come up for people, again, you’re going to want to look at the interest rate, the monthly payments that they’re offering you, how long you’d have to pay the loan.  

And they’ll tell you at the beginning, too, okay, if you keep this loan and you have it for the entire term, right, the entire length of time that the loan goes for, here’s how much total you’ll pay over the life of the loan because you’ll pay the amount that you borrowed. But then you’re also going to pay interest overtime.  

And last, even though, again, with private loans you’re not eligible for these programs like forgiveness, you do want to know what kinds of borrower protections these loans might afford you, right? 

So, Federal loans give you options like Income Driven Repayment and also other kind of hardship repayment plans so that your future self worst case scenario like what if you experience a medical emergency? What if you have a job loss? You’re unable to pay these loans. You want to know that you’re going to have options. You want to know you’re going to have some flexibility in paying those back. So that’s another thing to consider looking at private loans.  

So in a nutshell, like if you’re looking at this from the perspective of you’re a young person, you’re getting ready to go to college, this is a lot of numbers and a lot of math you can see kind of why it makes sense to say, OK, you know what, we’re just going to start with the FAFSA. It’s one form. We fill it out and then that’s going to help connect us to all these different types of funding. As much as you can kind of cover with that, that’s many fewer variables to have to deal with. 

Cassidy Clement 

You brought up a good point about community type scholarships. I think a lot of people overlook that. I utilized that a lot in high school going to college. Different clubs, community service programs, et cetera.  

Businesses are another one. Every year, Coca-Cola has a scholarship or Google has a scholarship and it’s a lot like applying for a job. You put in your information, you talk about your GPA, you talk about why you think you should get this scholarship and give a little bit of a portfolio background or write an essay. 

But it’s really worth it, because if you fill out the FAFSA and you do some of those, it’s helped you subsidize your cost without taking on any loans. And like you said, try to look at the free stuff first and see what you can do. Trust me. It’s worth it.  

Because when you get off that graduation stage, what you don’t want to be the first thing you get in the mail other than your transcripts is a bill. You don’t want that. So, not that exciting when you get a bill before the transcripts before you go to your first job or what have you.  

So you brought up some great points today. Thanks for joining us, Kate. 

Kate Wood 

No, thank you for having me.  

Cassidy Clement 

Sure. So as always, listeners can learn more about an array of financial topics for free at ibkrcampus.com.  

Follow us on your favorite podcast network and feel free to leave us a rating or a review. Thanks for listening everyone. 

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