There are two main categories of student loans: federal student loans and private student loans. As the names imply, federal student loans come through programs backed by the United States Department of Education. In contrast, private student loans come from businesses, including banks, online lenders, and specialized student loan companies.
If you plan to borrow for school, federal student loans are often the best place to get started. These loans come with special features that can cap your monthly payment based on your income and potentially have a portion of your balance forgiven. You don’t get those benefits with private student loans, which work more like an auto loan or mortgage.
To apply for federal student loans, you’ll need to complete the Free Application for Federal Student Aid (FAFSA). For private student loans, you can apply directly through each lender or use an aggregator like Credible to check your rate for multiple private student lenders at once.
When you take out a private student loan, lenders look at your credit history and finances when making lending decisions. With federal student loans, you may have an easier time getting approved and more flexibility in how you pay back your loans. These are some of the biggest benefits of federal student loans compared to private student loans:
If you’re worried about short-term cash flow, earned wage access from PayActiv is an essential tool for your finances. With earned wage access, you can get access to your earned but unpaid wages before payday. When you have student loan payments due, that can be an important financial lifeline.
Most federal student loans follow a 10-year repayment plan. Interest is charged monthly, and payments first apply to interest and then principal.
The math used to calculate payments over the life of the loan is referred to as amortization. With an amortization schedule, you can see how a fixed monthly payment leads to a $0 balance when the final payment is made.
Again, the power of earned wage access can be helpful. . The reason is that if you are able to make a payment early, even by just a day or two, it reduces the interest you pay over the life of the loan.
Let’s look at an example loan. Let’s say you have a $20,000 federal student loan balance with a 2.75% interest rate (we divide this by 12 to get a monthly rate) and a $125 monthly payment.
On this date, with a $20,000 balance, monthly interest would be charged like this:
$20,000 x 2.75%/12 = $20,000 x .002292 = $45.83
When paying $125, the first $45.83 would go to interest while the remaining $79.17 would lower the $20,000 balance to $19,020.83. Next month, interest would be a little less, and the contribution toward the loan’s principal balance would be higher.
You may want to pay extra if you can afford it. A larger payment puts more toward lowering the principal, which lowers your interest cost every month going forward. The faster you pay off your loans, the more you save on interest costs. That’s where earned wage access from PayActiv can help you.
If you’re having trouble with a student loan payment, don’t forget about your ability to access your earned wages through a partnership between your employer and PayActiv. In addition to earned wage access, PayActiv members can utilize free financial planning sessions and money management tools, all designed to keep your finances on track.
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