In case you are a typical high school student, the chances are that you don’t have enough money to pay for college. In these kinds of situations, you and many other people across the world can look to get a student loan to pay for education. Don’t be worried! There are a lot of people who do this. It’s the only way they can afford college. However, student loans aren’t that simple. There are various options available. The loan you get will determine your interest, repayment terms, and many other factors that will affect your life. On top of that, these terms will have an effect on your ability to pay back the loan successfully. Simply put, like with any other loan, the goal is to pay it back successfully in the end.
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What Is a Student Loan?
Student loans are borrowed from licensed financial institutions for the purpose of paying education expenses. Some of the most common education expenses include tuition, textbooks, boarding, fees, and other school-related costs.
College students can also fill out Federal Student Aid Applications (FSA) each year to see if they are eligible for some sort of financial help. In case you are, you can ask your school for various loans, work-study arrangements, and grants as a form of financial aid to help you get your education.
Getting a student loan can be really helpful, but you need to be careful with how you spend it. After all, this money doesn’t come free, and you will have to pay it back. At the moment, federal student loan interests go from 3.5% up to 7%. So, you will have to repay more than you borrowed.
RELATED: Everything you need to know about Student Loan Forgiveness
What Are Student Loan Types
Student loans have 2 main types, including – private and federal. We mentioned the interest rates of federal loans earlier. Bear in mind that private student loans have higher interest rates as they are backed by private banks. On the other hand, the federal government is responsible for backing federal student loans. Now, let’s see what each of these types has to offer.
A Private Student Loan
In most cases, it’s recommended to try getting a federal loan first before you start considering private loan options. The main reason for this is that private student loans come at a much higher cost with bigger interest rates that are variable. This means that the amount you have to pay can grow significantly over time. However, there are cases when students aren’t approved for federal loans, or they simply aren’t getting enough help for their education. In these kinds of situations, it might be a good idea to get a private student loan. But still, it needs to be considered thoroughly.
Here are some additional details you should know about these loans:
- They often require a credit score check: Among other factors, the costs of these kinds of loans are determined based on the credit score as well. Simply put, the better the credit score you have, the lower your interest rates will be. This can be challenging, as not all students have a credit score history.
- Loans often carry additional fees: A lot of private student loans come with fees that can add to the overall cost of the loan. Make sure to ask about them and go through the documents because they are usually hidden.
- They often require co-signers: A lot of private student loans require co-signers. These people are obligated to repay your loan if you are unable to do it for some reason. Co-signers are mandatory, and private lenders won’t give you loans unless you find one.
- Consolidation isn’t allowed: A private student loan can’t be consolidated into a consolidation loan like federal student loans.
- Private loans are unforgiving: In case you are having difficulties repaying the loan, bear in mind that private lenders won’t give you any deferments or forbearance.
- Interests often aren’t tax-deductible: Most private lenders don’t allow you to deduct your interest.
What to Look For When Shopping for Private Student Loans
When looking to buy these kinds of loans, make sure to consider repayment options, grace periods, and monthly payments as well. Consider all of these things during your search and find a good loan that doesn’t have excessively high-interest rates. At the same time, make sure that the repayment terms and fees are also reasonable and won’t just pile an enormous debt that you will have to pay off for a long time. Simply put, private loans are more unforgiving, and you need to make sure that you have everything in order before getting one.
A Federal Student Loan
These loans come with fixed interest rates and are less expensive overall. To get certain federal loans, it’s necessary to be enrolled in college. When you get one, you don’t have to start repaying it until graduating. Even if you leave college, you will likely get a grace period during which you won’t have to make payments. Each loan has different grace periods, but in most cases, you will have to start repaying the loan after six months. There are two types of federal loan programs:
- 1. Direct Loan Program
- 2. Perkins Loan Program
Direct Loan Program
This is the largest federal loan program, and it comes in 4 different ways:
- 1. Subsidized: These loans are available to undergraduates who are eligible and have proven their need for the loan. The government covers the interest while the student is still in school and 6 months after graduation.
- 2. Unsubsidized: These loans are available to professional students, graduates, and undergraduates, no matter what their financial needs are. However, the student has to pay all the interest, even the one that accumulated while in college.
- 3. Plus loan: Plus loans are available to students, eligible graduates, and dependent undergraduate’s parents. The loan size depends on attendance costs and whether you have any other financial aid.
- 4. Consolidation loan: Through this loan, you can put all of your federal loans in one joined loan.
Perkins Loan Program
With these loan programs, the institution you attend is your lender, not the government. It’s important to understand that not all colleges offer these loans. So, before applying for one, this is something you need to check. The Perkins Loan comes with low interests and is available to students, graduates, and undergraduates. To qualify for the loan, the school first assesses the student’s financial need and then checks whether they have enough aid available.
How to Repay a Student Loan
No matter what type of student loan you are getting, it’s important to borrow within your limits. Simply put, a lot of people over-borrow and spend money on things they don’t really need. Even though this might make your life comfortable for a certain period of time, it will be really difficult to repay the loan. It’s absolutely important to go through the terms and conditions of the loan you are getting in detail. Each loan is different, and you need to be aware of what awaits you.
Repaying Private Student Loans
Private student loans often allow you to start repaying while you are still a student. In case your loan allows this, when repaying it this early on, you will pay a lower monthly amount. If you want, you can also pay the full monthly amount. There is also an option to pay the interest alone so that you can have lower debt once you’ve graduated. Depending on the lender, you can get a grace period after graduating, if you don’t pay anything while in college. The repayment term also varies from one lender to another, but it’s usually around 25 years.
Some lenders also allow borrowers to choose a repayment term, and they adjust the interest and monthly installments accordingly. In some cases, you can get deferments. In others, you won’t. Make sure to find a loan calculator to see how much you will actually be paying and whether the loan will be manageable.
Repaying Federal Student Loans
In most cases, federal student loans are more flexible with their repayment plans. With these loans, you can get fixed monthly payment repayment plans, graduated plans which have a lower monthly amount (but it gradually increases), and extended plans that can have fixed installments or graduated ones. For standard and graduated plans, the repayment terms are a maximum of 10 years for each loan individually. If you consolidate the loans, the term can go up to 30 years. Extended repayment plans go up to 25 years. Federal student loans also come with pay-as-you-earn plans, including the Repaye plan and the Paye plan.
Student loans are loans, just like any other. You need to be responsible and pay them back regularly. Organize yourself properly and establish a budget that works for you. Getting a student loan is not the end of the world. Try to find a job as soon as you graduate to speed up the repayment process.