The median student debt in Knoxville is $22,702, according to a 2023 study by WalletHub. Many students take out student loans to pay for their continued education, but proactively figuring out financial logistics beforehand is crucial to ensure that students are aware of how to handle student loans responsibly.

What is a student loan?

A student loan is money borrowed from the federal government, a private source, such as a bank, or an outside organization that helps pay for a person’s education. Just like any other loan, student loans must be repaid to the loaning party with interest.

To take out a student loan from the federal government — the type most commonly taken out — students must file a FAFSA application. After filing with FAFSA, the university will reach out with a financial aid offer, including any federal student loan offerings, based on the information on the applicant’s form.

What should you know when taking out a student loan?

The most important thing to be cognizant of when taking out a student loan is that any money you borrow will be your responsibility to repay in full — plus interest, so be sure to calculate how much interest you’ll have to pay. For most federal student loans, you are required to begin making payments toward your loan within six months of graduation.

Be aware that the amount of money you receive is determined only by your education-related expenses, including tuition, books and housing. If you use money from your loan to pay for non-education-related expenditures, like clothing or vacations, you’ll end up paying more in the long run.

Another thing to note is that when you sign a student loan promissory note, you are making a commitment to repay the full loaned amount plus interest regardless of whether or not you graduate nor your financial situation post-graduation. So, be cautious when deciding how much money to accept, and don’t take out more than you expect to be able to afford.

The Federal Student Aid website recommends researching the entry-level salaries in your prospective industry when setting your expectations. Once you know how much you expect to make post-graduation, you can develop your payment plan accordingly, as your monthly payment may be based on a percentage of your monthly income.

How do you maintain a repayment plan?

When you graduate, you will automatically be registered for a fixed repayment plan called the Standard Repayment Plan unless you contact your loan servicer to enroll in a plan of your choosing. If the standard plan, described below, does not fit your needs, reach out to your loan servicer before or soon after graduation to discuss other options.

There are two main types of repayment plans for federal student loans: one with a fixed monthly payment and one based on your monthly income. The former is typically a cheaper monthly payment, while the latter guarantees that your loans are paid off within a set number of years.

Fixed repayment plans come in three forms: standard, graduated and extended. The standard plan establishes your monthly payment at the amount needed to pay your loan off in full within 10 years. The graduated version fixes you at a lower monthly payment that then increases every two years until the loan is paid off within 10 years. Finally, the extended repayment plan, which can only be used for student loans of more than $30,000, can be either fixed or graduated, but they ensure that loans are paid off within 25 years instead of 10.

As for income-based plans, there are four options to pay off federal student loans. These include the Saving on a Valuable Education Plan, the Pay As You Earn Plan, the Income-Based Repayment Plan and the Income-Contingent Plan. These vary in the percentage of your income you pay and whether or not your monthly payment is allowed to exceed what your payment would be under the fixed standard plan.

To be enrolled in one of these plans, contact your loan servicer, and they will discuss your options and help you sign up.

How do student loans impact your credit score?

Student loans can impact your credit score in a positive or negative way, depending on how responsibly you handle them. As long as you make payments on time, your credit score will benefit, and paying off student loans builds credit by adding a source to your credit mix.

Your credit score will suffer, however, if you are late making your payments. For federal student loans, service providers typically give you 90 days before reporting your late payment to credit bureaus. The later your payment is, the more it hurts your credit score, and a report of a late payment, or delinquency, will remain on your credit report for seven years.

If your financial situation changes, be proactive and communicate your needs to your loan servicer. You may end up paying more in interest if you alter your original plan to fit your new needs, but your credit score won’t be hurt if your payments are handled as you agreed on with your loan servicer.