WalletPrep worksheet · Debt
How do student loans work?
Name ____________________ Date __________
Key ideas
- Federal loans carry protections private loans lack. Payments tied to income, pauses in hard times (deferment, forbearance) and some forgiveness programs are federal. Private lenders' rules are narrower.
- Interest builds every day you owe. At 6%, $20,000 grows by about $100 a month in interest. A lower payment means paying that interest for more months.
- Refinancing federal loans is a one-way door. Refinancing means a private lender replaces your federal loans. Federal protections end for good, and you can't move them back.
Vocabulary
- Credit union
- A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
- Cosigner
- A second person who signs a loan and promises to repay the whole debt if the main borrower doesn't.
- Repayment Assistance Plan
- The newest federal income-driven student loan plan: 1% to 10% of your adjusted gross income, minus $50 a month per dependent, with a $10 minimum.
- Tiered Standard Plan
- A fixed-payment federal student loan plan whose length, 10 to 25 years, depends on how much you owe.
- Refinancing
- Replacing an existing loan with a new one, usually to get a lower interest rate, a lower payment or a different term.
- Income-driven repayment
- A federal student loan repayment plan that sets your monthly payment from your income and family size instead of from what you owe.
Work it out
Jordan owes $20,000 in student loans. Assume a 6% rate. She compares a 10-year fixed payment of $223 with a smaller $144 payment over about 20 years.
- Borrowed
- Interest at $223/mo, 120 months
- Total paid, 10 years
- Borrowed
- Interest at $144/mo, 238 months
- Total paid, about 20 years
- Minus the 10-year total
- Extra cost of the lower payment
Check yourself
Which is usually true of federal student loans but not private ones?
- A. They always have variable rates
- B. They offer income-driven repayment plans
- C. They require a cosigner
- D. They never charge interest
A $20,000 loan at 6% builds about how much interest in one month?
- A. $12
- B. $60
- C. $100
- D. $1,200
What happens if you refinance federal loans with a private lender?
- A. They stay federal
- B. You can switch them back later
- C. You lose federal protections like income-driven plans
- D. Your balance is forgiven
Your turn
Log in at StudentAid.gov and write down each federal loan's balance, rate, servicer and first disbursement date. Add any private loans from your credit report. Then run the Repayment Calculator to see your payment on each plan you qualify for.
Answer key
How do student loans work?
Work it out
- Borrowed$20,000
- Interest at $223/mo, 120 months$6,603
- Total paid, 10 years= $26,603
- Borrowed$20,000
- Interest at $144/mo, 238 months$14,231
- Total paid, about 20 years= $34,231
- Minus the 10-year total− $26,603
- Extra cost of the lower payment= $7,628
- At $223 a month, Jordan is done in 120 months and pays $6,603 in interest, for $26,603 in total.
- At $144 a month, it takes 238 months and $14,231 in interest, for $34,231 in total.
- The lower payment frees up $79 a month but costs $34,231 − $26,603 = $7,628 more over the life of the loan.
- Jordan picks the $223 payment. If her income drops, she can ask her servicer about lower federal options.
Check yourself
- B. They offer income-driven repayment plans Income-driven repayment is a federal option. Private lenders set their own terms and usually don't offer it.
- C. $100 $20,000 × 6% = $1,200 a year, and $1,200 ÷ 12 = $100 a month.
- C. You lose federal protections like income-driven plans Refinancing replaces federal loans with a private loan, so federal repayment plans and forgiveness programs no longer apply.