It is no secret that a college education these days can be quite expensive. In fact, according to U.S News, tuition and fees for in-state students at public four-year universities averaged out to $10,388 in 2021-2022 school year, which is a bargain compared to the $38,185 it was at private schools. And that number only continues to go up year after year. This is why student loans have become such an important part of the higher education process. For many people, they are the only way to afford to go to school.
But what most people don’t know is that there are different types of student loans available, and each one has its own set of benefits and drawbacks. So it is important to understand all of your options before you make any decisions about taking out a loan.
There are two main types of student loans: federal student loans and private student loans.
1) Federal student loans
Federal student loans are offered by the government, and they typically have lower interest rates than private student loans. They also usually offer more flexible repayment options, such as income-based repayment plans and deferment or forbearance options for those who are struggling to make their payments.
The most common type of federal student loan is the Stafford Loan, which is available to both undergraduate and graduate students. There are two types of Stafford Loans: subsidized and unsubsidized. Subsidized Stafford Loans are need-based, meaning that the government will pay the interest on the loan while you are in school. Unsubsidized Stafford Loans are not need-based, so the interest will accrue while you are in school, but you will not have to make any payments until after you graduate
Another type of federal student loan is the Perkins Loan, which is only available to undergraduate and graduate students who have exceptional financial needs. Like the subsidized Stafford Loan, the government will pay the interest on the Perkins Loan while you are in school.
Again, rules vary on deferment, but federal loans can be deferred after graduation in cases of hardship (e.g., unemployment, illness) for a few years. For deferment or forbearance, you will want to research the rules for each loan you have
2) Private student loans
Private student loans are offered by banks and other financial institutions, and they typically have higher interest rates than federal student loans. They also usually have less flexible repayment options, such as mandatory payments while you are still in school. One of the biggest things to keep in mind when taking out a private student loan is that you will likely need a cosigner.This is because private lenders may see students as high-risk borrowers, so they want someone else to share the responsibility of the loan with them. A cosigner is typically a parent or other family member who agrees to make the loan payments if you are unable to do so.
3) Interest Rates on Student Loans
The interest rate on a student loan is the amount of money that you will have to pay in addition to the principal (the amount of money you borrowed). The interest rate can be either fixed or variable. Fixed interest rates stay the same throughout the life of the loan, while variable interest rates can go up or down over time.
For example, let’s say you take out a $10,000 loan with a 4% interest rate. That means that you will owe $10,400 when the loan is due, which is the $10,000 principal plus the $400 in interest. If the interest rate on your loan is variable, then your monthly payments could go up or down depending on how the market changes.
Student loans are a necessary evil for many students. In order to attend college, many students must take out loans to cover the cost of tuition and other expenses. Your best bet would be to research different education loan options and get a feel for which type of loan would work best for your particular situation. The interest rate is not the only thing to consider when taking out a loan, repayment terms are also important.
If Interest rates decline in future, it may also be possible to refinance your student loans at a lower interest rate (in some cases you can consolidate all your loans at one lower interest rate after graduation).
4) Student Loan Repayment Plans
There are several different repayment plans available for student loans, and the one you choose will affect how much you will have to pay each month and how long it will take to pay off your loan. The most common repayment plan is the Standard Repayment Plan, which has a fixed monthly payment for up to 10 years. There are also income-based repayment plans, which base your monthly payment on your income and family size. These plans can extend your repayment period to 20 or 25 years. There are also deferment and forbearance options available for those who are struggling to make their payments.
Choosing the right student loan can be a daunting task, but it is important to do your research and understand all of your options before making a decision. These four facts should help you get started on your journey to finding the right loan for you.