Student Loans: Introduction

Here at DRF, we regularly get calls from people that are struggling with student loan debt. Many of them have not had the chance to learn about several very powerful strategies that can be used to manage and pay off their student debt. Because of this, we have decided to start a short blog series about these management strategies, who they will work for, and how to best use them.

Before that, we should go over some terminology and definitions that are necessary to understand your situation when it comes to student loans. First, some terms that might come up when discussing student loans.

  1. Origination Fee: A percentage of the total loan amount that is payed up front. Generally, somewhere from 3% to 10%.
  2. Deferred Payment: Not having to begin paying back a loan until a certain point in time. In many cases, you do not have to start paying back a loan until you have graduated.
  3. Discretionary Income: In this context, discretionary income is calculated as the difference between your gross income and 150% of the poverty line based on where you live and your family size.

Next, there are two main types of student loans, Federal and Private:

  1. Private Loans: These loans are money lent to you by any private, non-government organization. These could be a loan from a major bank, a specialized student loan company, or anything else.
  2. Federal Loans: These loans are money lent to you, either directly or indirectly, by the government. This might be through a direct loan from the Department of Education, or through a Federal Family Education Loan Program (FFEL), which is a loan that is granted by a private organization like a private loan except that the organization has a guarantee that if you fail to pay back your loan then it is the Department of Education that will have to collect the money from you not the institution. In many cases, federal loans are only granted to people found to have a financial need for assistance.

There are many types of federal loan, each that might be applicable to some specific situation, but there are three that are by far most popular.

  1. Stafford Loans: These loans are popular because they are very flexible. They are available to people that cannot prove they have a financial need for assistance, although you will get some benefits if you can. They are also available to both undergraduate and graduate students and do not require credit approval.
  2. Perkins Loans: Similar to Stafford Loans in many ways, except that Perkins loans are granted to only students that can demonstrate a distinct financial need for aid. They have relatively quite low interest rates and do not have origination fees.
  3. PLUS Loans: These are loans taken out by the parents of students to pay for their children’s education.

For information on how to understand your student loan debt and methods for how to manage your student loan debt moving forward please check back to the DRF Flourish Financial Blog as we will continue this series there. As always, if you have any questions or concerns about debt or your financial situation, please feel free to reach out to us.