How Long Does it Take to Build a Credit from Scratch?

How long does it take to build credit? If you need money for college, you might consider a student loan. But before you apply for one, it’s important to understand how they work. This article journeys you through all you need to know about student loans and how to get one.

How do student loans work

What is a Student Loan?

If you don’t have the money to pay for college, a student loan will enable you to borrow money and pay it back at a later date, with interest.

College loans are different from a grant or scholarships. If you receive a grant or a scholarship, you’re not borrowing that money. That is money that has been given to you as a gift and doesn’t need to be repaid.

What Types of Student Loans are Available?

There are two main types of lenders that offer student loans. The U.S. government offers federal student loans. Banks, credit unions, state loan agencies, and other financial institutions offer private student loans.

Be careful, as some of the lenders that offer private student loans also service federal student loans on behalf of the U.S. government, so it is easy to get confused.

1. Federal Loans

Federal student loans are loans that are made by the U.S. government. It’s a good idea to take out federal loans first because these loans are less expensive and usually come with more benefits than loans from private lenders.

The advantages of a federal loan over a private loan include:

1. Fixed and lower interest rates

2. The ability to borrow money without a cosigner

3. Repayment plans that start six months after you leave college or attend less than half time

4. Flexible repayment plans like income-driven repayment and extended repayment

5. There is also the possibility that some of your loans can be forgiven that is, you don’t have to repay them if you work in certain professions, such as teaching and public service

There are four types of federal student loans for college:

2. Direct Subsidized Loan

Subsidized Stafford loans are available to undergraduate students with demonstrated financial need.

While enrolled in college at least half-time and for six months after you graduate or drop below half-time enrollment, you won’t have to pay interest on the amount you borrowed. This can be huge cost savings.

3. Direct Unsubsidized Loan

Unsubsidized Stafford loans are available to undergraduate and graduate students, regardless of financial need.

Unlike subsidized loans, you will need to pay the interest that has accrued on your loan while you are in college, or the interest will be capitalized (added to the loan balance).

4. Federal Direct PLUS loan

Grad PLUS and Parent PLUS loans are available to graduate students and parents of dependent undergraduate students.

PLUS loans aren’t subsidized, so interest will start accruing as soon as I fully disbursed the loan. Repayment can be deferred while the student is enrolled in college and for six months after graduation. How do student loans work?

5. Federal Direct Consolidation Loan

Consolidation loans allow you to combine multiple federal student loans into one loan, without losing the benefits of the federal loans. Consolidation can be used to streamline repayment or to switch loan servicers. How do student loans work?

6. Private Loans

Private student loans are loans that come from a private lender, usually a bank, a credit union, a state loan agency, or a non-bank financial institution.

They can come with fixed or variable interest rates and often require the student borrower to have a cosigner. Interest isn’t subsidized, so as soon as you borrow money the loan will begin accruing interest.


How Does Interest in a Student Loan Work?

Because you’re not just paying back the amount you borrow, you’re paying back interest as well, it’s important to understand how much that will add to the total amount you pay.

How much you pay in interest depends on a number of factors: whether your loan is subsidized or unsubsidized, the interest rate on your loan, the amount you borrow, and the loan term.

For example, you graduate with a $10,000 loan with a 5% interest rate and plan to pay it off over 10 years. You will pay $2,728 in interest over the 10 years that you repay the loan. How long does it take to build credit?

How to Pay Less Interest

You can reduce the amount you pay in interest by making extra loan payments to pay it off sooner or by refinancing your student loan to a loan with a lower interest rate.

However, refinancing federal student loans into a private loan means a loss in many benefits – income-driven repayment options, possible loan forgiveness or widespread forgiveness, generous deferment options, and a death and disability discharge.

How Do you Apply for Student Loans?

The application process for federal student loans and private student loans is different. Remember, you should only apply for a private student loan once you have exhausted your federal student loan options. 

1. Federal Student Loan Process

To apply for a federal student loan you’ll need to file the Free Application for Federal Student Aid (FAFSA). The information on the FAFSA will determine how much you’ll be able to borrow.

Your college will send you a financial aid offer, which will include details on how to accept your loan. You will then need to sign a Master Promissory Note (MPN).

To apply for a private loan you don’t need to file a FAFSA. You’ll need to apply for a loan with an individual lender. The lender will check your credit score and will often require a creditworthy cosigner. How do student loans work?

How Much Can You Borrow?

Because you will have to pay back the money that you borrow with your student loans for college, only borrow what you really need. The amount that you can borrow depends on the type of loan.

2. Private Student Loan Process 

For federal loans, your college will determine the amount of money that you can borrow, but there are some limits:

1. Undergraduate Federal Direct Stafford Loans

The borrowing limits are from $5,500 to $7,500 per year for dependent students and $9,500 to $12,500 per year for independent students, depending on your year in school.

2. Graduate Federal Direct Stafford Loans

The borrowing limit is up to $20,500 per year for graduate and professional students and up to $40,500 per year for medical school students. How long does it take to build credit?

3. Private Loans

The maximum amount you can borrow from a private lender varies. Most lenders don’t let you borrow more than your college’s cost of attendance minus other financial aid.

Direct loans are also subject to aggregate loan limits, meaning there’s a maximum on the total amount that you can have in outstanding loans.

The borrowing limit for Federal Direct PLUS loans is generally the remainder of the cost of college not covered by Federal Direct Stafford loans and any other financial aid.

When Do You Pay Back Your Loans?

Federal Direct Stafford loans require that you begin loan repayment six months after you graduate, leave school, or drop below half-time enrollment.

Although Federal Direct PLUS loans previously entered repayment within 60 days of full disbursement, since 2008 borrowers have been able to defer repayment until six months after the student graduates or drops below half-time enrollment.

Private loan repayment depends on the terms set by the lender. You may find that your lender requires you to make loan payments while still in school, though there may be options to defer (postpone) making loan payments. Interest continues to accrue during an in-school deferment and grace period.

If you don’t have the money to pay for college, student loans are a great option to help you finance your education. But it’s important to understand how loans work so there aren’t any surprises when it’s time to begin loan repayment.

How Does Student Loan Interest Work?

So, interest can be your friend—the good kind of interest that makes your investments grow from a couple of hundred dollar bills to a mountain of cash, that is. But what about when it’s loan interest?

That’s a totally different story. The way interest works on a loan means you end up paying way more money than you originally borrowed. It’s the worst.

To figure out your loan interest, you have to understand a few terms. Boring, I know. But stay with me!

1. Loan Repayment Term: That’s how long you have to pay the loan back. For most federal loans, that’ll be 10 years (but it can take up to 30 years). For private loans, the term can vary based on the terms of your loan agreement.

2. Interest Rate: This is how much interest you’ll be paying on the loan. Federal loan rate percentages can vary per loan, but they’re usually fixed (meaning the interest stays the same every year). How long does it take to build credit?

Private loans are typically based on your credit report and rating, so they can vary a lot—and they can be fixed or variable. How do student loans work?

3. Principal: This is the base amount you owe for the loan, not including interest. So, if you took out $35,000 in loans, your principal would be $35,000. (That’s the average amount of debt each student loan borrower will graduate with, by the way!)

So, here’s the math (everyone’s favorite part): Let’s take that $35,000 principal and say you have a 10-year loan repayment term with a fixed interest rate of 5%. (Typical interest rates can range from 3.73–5.28%, depending on the loan type). How do student loans work?

With those numbers, your monthly student loan payment would be just over $370, and the total amount of interest you’d pay during the loan term would be almost $9,550.


Student Loan Repayment Options

If you decide to take out student loans (which I already know you won’t do, because you promised), you also make a decision for your future self the decision to spend the next 10 or more years of your life making monthly payments. 

Here’s a quick look at what you could be dealing with.

Repaying Federal Loans

1. Standard Repayment Plans: The government or your lender provides a schedule with a set monthly payment amount. For federal loans, the plan is for 10 years. Private loans will vary. How long does it take to build credit?

2. Graduated Repayment Plans: The payments start off lower, but they increase every couple of years or so. The plan is still to have everything paid off in 10 years. How do student loans work?

3. Extended Repayment Plans: These plans extend the payments beyond the normal 10-year window for borrowers who have more than $30,000 in outstanding loans.

The payments could be fixed or graduated (meaning the payments increase little by little) and are designed to pay off the loan in 25 years. How long does it take to build credit?

4. Income-Based Repayment Plans: These plans base your payments on a percentage of your income. Usually, you’ll pay between 10–15% of your income after taxes and personal expenses are covered.

The payments are recalculated every year and adjusted for things like the size of your family and your current earnings. How long does it take to build credit?

5. Income-Contingent Repayment Plans: This is similar to the income-based plan, but is based on 20% of your discretionary income (that’s the amount of income you have left after your set expenses are taken care of).

The rates are adjusted every year and the balance can be forgiven—and taxed—over time (usually 25 years). How long does it take to build credit?

6. Income-Sensitive Repayment Plans: These are similar to the other income-related plans, but the payment is based on your total income before taxes and other expenses, instead of your discretionary income.

The loan payment is calculated to be paid off in 10 years. How long does it take to build credit?

Repaying Private Loans

Since private loans are agreements between you and the lending institution, the lender makes the rules for payment.

You’ll pay a set amount each month that’s a combo of a principal payment and interest, and the payments are usually set for a specific amount of time.

Any changes in that plan like a graduated-payment schedule would need to be negotiated with the lender (you could always try bribing them with cookies or something). How do student loans work?

What Happens if You Can’t Afford Your Monthly Payment?

When you take out student loans, you commit to paying back the money. But you might’ve heard about some loan-dodging options that let you take “the easy way out.”

Honestly, these options are only temporary, short-term fixes to long-term problems—and sometimes, they can end up costing you more in the long run.

1. Forbearance: Your payment is put on hold, but the loan continues to accumulate interest. There are two types of forbearance: general (where the lender decides your level of need) and mandatory (where the lender has to grant forbearance based on your situation).

2. Deferment: With deferment, you temporarily don’t have to make payments, and you may not be responsible for paying interest on your loan.

Not everyone is eligible for deferment or forbearance, but you might qualify if you’re unemployed, serving in the military during wartime, or serving in the Peace Corps.

3. Student Loan Forgiveness: Again, not everyone qualifies for this—there are a whole bunch of different requirements, like working full time in a qualifying public service job while making payments for 10 years, teaching in a low-income school for at least five years, etc.

The scary thing is, as of April 2021, less than 1% of applications for student loan forgiveness through public service was actually approved.6 You can’t rely on this stuff, y’all. How do student loans work?

4. Default: This is what happens if you keep missing payments. Your loan is referred to as delinquent the day after you miss one payment, and if you continue to miss payments, you go into default. How long does it take to build credit?

This means you failed to pay back the loan based on what you agreed to when you signed the paperwork, and it can have super serious consequences.

You could be taken to court, lose the chance to get other financial aid or be required to pay the entire balance of your loan right away. Not fun.

How do student loans work

Refinancing Student Loans

 Refinancing is actually a great option for some people. It can definitely help you get that loan paid off quickly! But it’s not a universal solution for everyone. How long does it take to build credit?

So it’s important to think through your own specific situation before you go with refinancing. There are four things that must be true for it to work:

1. It should be completely free to refinance. Why buy something you could get without paying a dime?

2. Only go with a fixed rate. Don’t give your lender the power to pull your rate way up at some random future date.

3. Go for a shorter loan repayment term than you currently have. We are trying to speed this process up!

4. Get yourself a lower interest rate. The less interest you can pay the better!

If you can’t say yes to each of those items, refinancing is not your best strategy. But if you find a lender who helps you pay less interest, with no fees, a fixed rate and a quicker payoff date, you’ve got a winner!

This is the company I recommend as the best way to get a great deal on student loan refinancing. How do student loans work?

How to Avoid Student Loans

Still not convinced that student loans are the worst way to fund your education? What if I told you that roughly 6% of students owe more than $100,000 in student loans (which seriously slows down all financial progress after graduation)?

According to our own Ramsey Research, 63% of student loan borrowers worry consistently about paying back the money, and 44% of them say they can’t even buy a house because of their student loan debt.

Here are just a few examples of how you go to school without loans:

1. Find Scholarships and Grants. You can find free money by filling out the FAFSA form, researching organizations in your field of interest that offer scholarships, and using online scholarship search tools.

2. Choose a School you Can Afford. That might mean starting out at community college or going to a public, in-state school instead of a private university (there really is a huge difference in tuition costs).

It might mean going to a trade school or vocational school—and that’s totally okay. If you find yourself asking if college is really worth it, remember: The only real “dream school” is the one you can afford to go to debt-free.

3. Work. Yep, even when you’re in high school. A part-time job or side hustle won’t hurt your grades if you keep it to 20 hours per week or less, and you’ll make bank for your college fund. Once you’re in college, try looking for an on-campus job or work-study program, or apply to be a teaching assistant.

4. Be Smart About Your Lifestyle. Going to college doesn’t mean you have to live in a fancy dorm room with a $10,000 meal plan. Live at home if you can. Stop eating out with your friends every weekend.

Split groceries, rent and utilities with a roommate (or three). Use public transportation or walk whenever possible. Get creative and find other ways to cut down on costs. How long does it take to build credit?

How Much Money Can I Borrow in Federal Student Loans?

If you are an undergraduate student, the maximum amount you can borrow each year in Direct Subsidized Loans and Direct Unsubsidized Loans ranges from $5,500 to $12,500 per year, depending on what year you are in school and your dependency status.

If you are a graduate or professional student, you can borrow up to $20,500 each year in Direct Unsubsidized Loans. They can also use direct PLUS Loans for the remainder of your college costs, as determined by your school, not covered by other financial aid.

If you are a parent of a dependent undergraduate student, you can receive a Direct PLUS Loan for the remainder of your child’s college costs, as determined by his or her school, not covered by other financial aid. How do student loans work?

When Do I Start Paying Back My Student Loan?

Another popular question brought up when on the topic of student loans is “How are student loans paid out?”. Repayment terms on student loans vary based on the type of loan.

Federal student loans are often designed to be paid off within 10 years, whereas private student loans might differ based on the lender’s terms.

Students usually won’t have to begin making their federal student loan payments until six months after graduation (or if they drop below half-time status). That said, you always have the option to begin making payments while you’re still enrolled in school.


How Much Will I Owe on My Student Loan Each Month?

This amount will differ for each student based on the amount they borrow and their interest rate. At College Ave, we offer a student loan calculator that allows borrowers to calculate how much their loan will cost and what their monthly payments will be.

Once it’s time to make monthly payments, lenders commonly offer the option to enroll in automatic payments, which allows your monthly payment to be regularly debited from your bank account.

This can be a convenient option since you’ll never have to worry about missing a payment. As a bonus, you’ll often get a reduction in your interest rate for setting up auto-pay. How long does it take to build credit?

Frequently Asked Questions

If you qualify for loan forgiveness, cancellation, or discharge, you are no longer required to make loan installments. If you qualify for only a portion of your loan to be forgiven, canceled, or discharged, you must repay the remaining sum.

To be eligible for a federal loan, you must complete and submit the Free Application for Federal Student Aid, sometimes known as the FAFSA. Borrowers must respond to questions. How do student loans work?

A student loan is a sort of loan that is intended to assist students in paying for post-secondary education costs such as tuition, books, supplies, and living expenses. How long does it take to build credit?

What exactly is a student loan? If you don’t have enough money to pay for your education, a student loan will allow you to borrow money and repay it with interest at a later date.

Private student loans are obtained by parents or independent contractors and do not allow for deferred payments. The collection process is quick and not at all mysterious.

No way, no how. You get compensated for the number of hours done. FAFSA has never given a refund because it does not provide financial help. The FAFSA is only an application form.

If your FAFSA qualifies you for government grants, loans, or work-study programs, the funds will be paid directly to your school. Your school will apply grants and loans to your tuition, fees, and room & board (if you live on campus).

In general, no one is keeping track of how you spend your student loan money. However, if your lender discovers that you misappropriated student loan funds, you may face sanctions.

Directly apply with a bank, credit union, or online lender. The interest rate and payback conditions are influenced by your credit history.

CSN Team.

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