STUDENT LOANS EXPLAINED
Deciding to take out a loan is not the end of the road.
You need to decide if you are taking out a private or federal loan and from there determine the best specific loans to borrow.
Always do adequate research to determine what your options are as rushing into a loan agreement is disastrous.
You do not want to take out a loan only to find yourself trapped into contractual obligations you cannot honor.
Some important areas to check for are repayment plans and expectations, how much interest the loan accrues while you are attending school and what happens if you miss any payments.
Understanding what you are getting into before taking out a student loan is one of the best, first decisions in your higher education journey.
What are student loans?
Student loans are sums of money you accept from a lender.
The premise of a student loans is you pay back the amount you borrowed, plus any accrued interest.
Depending on the type of loan you take out, interest may start to compound for the length of the loan, even while you are still in school.
When the lender expects you to begin repaying the loan may also change depending on the lender.
This is why it is crucial to be smart about the company you borrow from and how much you take.
Taking the highest dollar amount is not always the smart move.
Two categories of student loans exist, federal and private Loans.
With federal loans the lender is the United States Department of Education.
Private loans can come from your college, banks or credit unions. Each loan has its benefits and drawbacks.
Typically, it is recommended you exhaust all federal loan options before taking out a private loan.
This is because federal loan programs offer better interest rates as compared to private loans.
Additionally, many private loans have extra requirements written into the contract by the lender.
Learn About Requirements for Student Loans
There is no one-stop shop for both private and federal loans.
If you are applying for federal loans, you must file the Free Application for Federal Student Aid (FAFSA).
FAFSA makes it easier to receive offers from different lenders and companies.
Additionally, it makes disbursement and repayment easier.
Most loans are offered based on financial need. To file with FAFSA, you need plenty of educational and financial documentation for both yourself and any contributing family members.
To apply for private loans, you need credit history.
In the event you do not have a long enough credit history, or you have a poor credit score, try to get a co-signer for the loan.
Co-signers vouch for your ability to pay back the loan.
If you fail to make payments on your loan when the time comes, your co-signer is responsible for making the payments on your behalf.
Learn About Subsidized Versus Unsubsidized Loans
Two important designations to keep in mind are subsidized and unsubsidized loans.
When you take out a loan it begins to accrue interest, whether it is a federal or private loan.
Subsidized loans indicate the U.S. Department of Education is willing to pay the interest on your loan for you as you attend classes.
Since the Department of Education is paying the interest, the total loan amount ends up being less as opposed to an unsubsidized loan.
If you receive an unsubsidized loan you are responsible for any interest compounding on the loan while you attend school.
Unlike subsidized loans, unsubsidized loans do not have a financial neediness eligibility requirement.
Always canvas your options and take out a subsidized loan whenever possible if you qualify.
Learn About the Available Federal Student Loans
Federal student loans are the most popular category of student loan and are often referred to as direct loans.
Currently, four different loan types are available to students.
Each loan type comes with its own regulations and requirements:
- Direct Unsubsidized Loans
- Direct Subsidized Loans
- Consolidation Loans
- Direct PLUS loans
Direct subsidized loans are offered specifically to undergraduates displaying financial need.
Unsubsidized loans are offered to any level of student from undergraduate to professional students.
If you have multiple loans from different lenders, sometimes consolidation loans are the best course of action.
Consolidation loans combine all eligible federal loans into one larger loan under a single loan servicer.
Direct PLUS loans are based on credit checks. Parents of dependent, graduate and professional students are eligible to receive a Direct PLUS loan.
How to Be Smart About the Amount You Borrow
Just because you can borrow $10,000, does not mean you should.
Always be smart about how much you borrow. It is never smart to borrow so much money you land yourself in a situation where repayment takes 60 years.
With federal student loans, your university is required to disclose the cost of attendance to ensure you do not borrow too far over the tuition amount.
It is best to calculate how much money to borrow based on:
- Cost of living at your school.
- Your other available financial aid offers.
- General college expenses, like transportation and supplies.
- Expected graduation date.
Do Not Forget About Repayment Options
After you graduate, depending on your loan type, you may have a grace period.
A grace period is defined as a set timespan where you do not have to immediately repay your loans.
A typical grace period is six-months.
During this time interest may still build on your loans. The exception to this is the Direct PLUS loan, as it does not have any grace period.
If you plan on returning for a higher degree, look into deferment options.
When you defer a loan, you do not have to pay money on the loan if you are in school.
The amount you pay is not a fixed amount across all loans.
Each loan uses a specific set of factors to determine what your monthly payments are.
The four factors to consider are:
- Loan type
- Loan interest rate
- Amount borrowed
- Repayment plan
Always speak with your loan servicers to determine the best replacement plan.
Many different options are available.
All payments are submitted to either your loan servicer or lender.
For any difficulties with repayment, talk to your loan servicer immediately.
The last thing your servicer wants is for your loan to go into default.
Defaulting on a student loan means your debt goes into debt collections and your credit score is severely damaged.
Worse case scenarios include legal action taken against you for the amount you still owe.
Speaking with your loan servicer is the quickest way to devise the best outcome for your loan.