Student loans. Arguably two of the scariest words in the human language. Even the most prepared students can find themselves confused and bewildered when it comes to using loans to pay for their education.
There are many terms and conditions that go along with college loans and it’s important to have a full understanding of what each loan entails prior to signing off on them. Here we will break down the two most common types of student loans: federal and private.
Federal Student Loans
In the United States, federal student loans are granted, as expected, from the federal government. There are two different types of federal student loans subsidized (based on financial need) and unsubsidized (not based on financial need). For both of these loans, the school you are attending decides how much you can borrow, based on your total cost of attendance, expected family contribution, other aid you have received, and other factors.
There are several key features that differentiate these types of loans from other forms of student aid. For example, you do not have to start paying back federal loans until after you graduate, leave school, or decrease enrollment to less than half time. The interest rate on these loans is often fixed and has a lower rate than private student loans. If the federal student loan is subsidized, the government will cover the interest while you are still enrolled in school at least half-time. Other benefits include that you do not need a cosigner and you don’t need a credit check for most federal loans. In addition, having federal student loans can help you establish a good credit score.
When it comes to paying back federal student loans, there are several payment options, including the ability to tie your monthly payment to your income, meaning that how much you pay back each month is based on how much money you are making. In addition, there are no prepayment penalty fees with federal student loans meaning that you will not be charged for paying back your loans in a shorter amount of time than was expected (and less time paying back loans means that you will owe less interest in the long run!).
Private Student Loans
Private student loans can come from a variety of lenders including banks, credit unions, or a school. Since there are many different types of private student loans available, it is important to research and find the best option for you and to always read the terms of the loan before signing. Despite there being many different types from many different lenders, there are a few characteristics that are true for most private loans.
Unlike federal student loans, there is usually no limit to the amount of private loans you can take out. Also unlike federal student loans, you may have to start repaying loans while you are still in school. Private loans can also have variable interest rates which may increase the total amount you have to pay. Since you may need a credit score in order to get a private student loan, many will require a parent or guardian to cosign the loan. This means that if you are not able to repay the loan, the cosigner will take responsibility.
Private loan repayment plans vary greatly so you should always check to make sure which plans are available to you before signing. Depending on the terms of the loan, there may be a prepayment penalty fee meaning that you will be charged if you pay back the loan before a specified time. In the long run, this can add more interest that you are responsible to pay back and make it more difficult to pay back the loan.
Overall, when it comes to student loans, it is important to look into all of the options available to you and make the best choice based on your situation. If you are confused about any part of the financial aid process, reach out to your financial aid counselor at your school, they are there to help you and answer any questions you may have, about student loans or otherwise.