Student loans: What borrowers should know about federal, private loans

With $1.7 trillion of student loan debt accrued in the United States, loan forgiveness is at the forefront of borrowers’ minds. Yahoo Finance Reporter Ronda Lee joins the Live show to break down repayment options as loan payments are set to resume on October 1. Lee urges borrowers and potential borrowers to prioritize knowledge of loan options and what they offer, emphasizing the key differences between federal and private loans.

Click here to watch more of Yahoo Finance's special coverage "Student Loans: Smarter Strategies."

Video transcript

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- Americans have a staggering $1.7 trillion in student debt. Now this number can be anxiety inducing for borrowers, which is why the conversation around loan forgiveness and cancelation has become so prevalent. But what loans are eligible for forgiveness? And what are the different types of student loans? Well, joining us now to break that down as part of our Student Loan Week is Yahoo Finance's reporter Ronda Lee. Good to see you, Ronda. So help us break this down.

RONDA LEE: No problem. So the first thing we want to talk about is financial literacy. And the bigger problem is that, a lot of times, borrowers are taking out this debt not understanding what's happening. They don't understand the difference between federal student loans versus private student loans. And just to educate our readers, 92% of student loan debt is federal student loan. The other 8% is private student loans.

Here's the big difference. When you have your federal student loans, typically, they are in deferment while you are in school. So you don't start your payments until after you graduate. When it comes to private student loans, you can possibly be required to pay on those while you're in school. The other thing you need to know is that, with the federal student loans, there is a fixed rate.

With your private student loans, there can be a fixed or variable rate, which means that one month your payments might be lower, but as interest rates go up, which we've seen over the past nine months, then your payment increases. I saw this a lot in 2008 when we had the crash, and people who had $600 a month payment with their private student loan lender, it jumped up to 1,300.

The other thing you really want to consider when you're talking about federal student loans and getting student loans is that, when it comes to federal student loans, your loans, if you unfortunately die while you have your loans, your debt dies with you with federal debt. If you have private student loans and you die, that debt passes on to your state, which means that your parents, your spouse, or your heirs, will take on that debt.

So these are conversations that need to happen and people need to understand, what's happening with their federal with their loans before they get into them, as they're looking at their FAFSA application, trying to decide whether or not the parents want to get the parent PLUS Loan-- another reason why you want to make sure you are taking a look into this. With your federal student loans, there are several ways to do repayment. One of the great things about them is the income driven repayment plan, IDR. If you have federal student loans, you want to know about IDR.

With IDR, if you have been in repayment for 20 to 25 years, after 20 to 25 years, the remaining balance is forgiven, or discharged. Also, if you have federal student loans and you're a teacher, you're a doctor, or you work in public service, you're firefighter, after 10 years of repayment, your loans are discharged. If you have private student loans, that is not the case. Or if you refinance your federal loans into a private loan, you miss out on those options.

So when you're looking into this, be sure you're looking at what happens after you take out those loans before you sign on them because-- I've run into too many borrowers who were doctors, worked in public service, and they thought they were eligible for Public Service Loan Forgiveness, but they reified those federal loans into private loans, and they cannot get the benefit of that.

So those are just things that parents, borrowers need to consider before they sign on the dotted line. Take the time to ask the questions.

- And Ronda, you raise a very good point there, especially people looking at the front end of the loan, not really thinking about the consequences of things, as you mentioned there, of what they could be missing out if they refinance. Appreciate you breaking that down for us. Our very own Ronda Lee, thank you, as always.