the ultimate guide to student loans
The student loan debt crisis is in the trillions, surpassing credit card debt in America for the first time in history. Too often, young students are confronted with massive student loan debt, signing on without actually understanding the terms.
In this article we’ll break down the different types of loans and what those tricky terms actually mean.
Before you take on a loan, think about what you want to do with this education. Are you an undergraduate or grad student? What are your potential earnings? What sort of lifestyle do you want to live when you graduate? Check out post on avoiding the student loan trap here.
Type of Loans: Federal vs. Private
There are two main types of student loans: federal and private.
Federal Loans: These are available through the government and typically offer lower interest rates. You don’t need a co-signer for federal loans; you just need to fill out the Free Application for Federal Student Aid (FAFSA) each year.
Private loans: These are loans available through private lenders such as Sallie Mae.
Types of Federal Loans
Below are the most common types of federal loans. When you receive your federal loan package you may receive one or a combination of these.
Direct Subsidized Loans: These loans are available to undergraduate students who qualify for financial need and plan on attending a qualified four-year college or university, community college, or trade school. The US Dept of Education will pay the interest on the loan while you’re in school at least half the time, for the first six months after you graduate (known as the grace period), and during a period of deferment. The school will determine how much you can borrow and cannot exceed the determined financial need.
There is also a maximum time limit on how long you can receive loans. If you are a first-time borrower, you may not receive loans for more than 150 percent of the published length of your program. For example, if you are enrolled in a four-year program, you are eligible to receive loans for up to six years (4 years x 150%). This eligibility does not restart if you switch programs with the same term length (ie switching between four-year programs).
Direct Unsubsidized Loans: These are very similar to subsidized loans but you don’t need to qualify for financial need. Like the subsidized loan, the school will determine the amount you can borrow based on the cost of your education. However, unlike the subsidized loan, you are responsible for the entire cost of the interest.
There are dollar limits on subsidized and unsubsidized loans. You can review those more in depth here on the Student Aid Website.
PLUS Loans: PLUS loans are available to both graduate students and parents. PLUS loans do require credit checks. The maximum you can borrow is determined by the school.
Private Loans
Both undergraduate and graduate students can apply for private loans through credible lenders. If you have excellent credit, or have a co-signer with excellent credit you can sometimes achieve a better interest rate than federal loans. Please note however that private loans do not always offer the same flexibility as federal loans (flex payment plans, deferment, loan forgiveness, etc). Please review our blog post on student loans for more information on student loan forgiveness here.
be sure to review the following very carefully:
- Interest rate: The % of your loan you will pay back in addition to the principal. This is your cost of borrowing. For government loans, the interest rate typically vary anywhere between 2.5%-7%.
- Payback period: The number of years you will be paying back this loan if you pay the minimum required.
- Promissory Note: This is the contract you sign with your lender when you take on the loan.
- Consolidation/Refinance: Because you may be taking on more than one loan, or a new loan every year, you may be offered the chance to refinance or consolidate your loans. When you refinance, you take out a new single loan with a new interest rate based on your credit score, income, and other factors. If you are able to get a new interest rate that is lower than your current rate you may be able to save money.
- Deferment and Forbearance: These are ways to provide temporary relief when/if you come up on hard times and are struggling to repay your loans. These options allow you to suspend your payments for a period of time. Please note however that interest will continue to accrue so you will still have to pay this regardless of whether or not you take time off from paying the principal.
- Delinquent/Default: Once your loans enter the repayment period you are required to make the minimum payment + interest. Should you miss multiple payments, your loan will go into delinquency first and eventually default if not repaid. This will be reported to credit agencies and have a significant negative impact on your credit.