What is a student loan and how does it work?
There are many long-term benefits of obtaining a college degree, but you should also consider the significant financial implications. A student loan is money that you borrow from the federal government or a private organization to pay for tuition and repay it later with interest. By educating yourself about the different types of college loans and making wise borrowing decisions, you can limit your debt load after you graduate.
How to get a student loan
To apply for a federal student loan, the first thing you need to do is complete the Free application for federal student aid – otherwise known as FAFSA. States and colleges use information from the FAFSA to determine your eligibility for financial aid. You will need to provide personal and financial information for yourself or for your parents or guardians if you are dependent on them. Some information you will need includes your:
- Social Security Number (or Aliens Registration Number if you are not a U.S. citizen)
- Federal income tax returns, W-2 forms and any other records of money earned
- Bank statements and investment files
Once the amount of money you are allowed to borrow has been determined by your school, financial advisors can instruct you on how to accept all or part of your loan. Before you can do this, you may need to input tips to make sure you understand the loan obligations you are accepting, any other college payment options you may consider, and how best to manage education expenses.
You will also need to sign what is called a Master Promissory Note, which sets out the specific terms of your loan. It is a document that you should keep for your own records.
Types of student loans
Many students depend on federal loans to pay for their education, but there are several types of student loans and these differences are critical.
The US Department of Education offers loans directly to graduating students. The loans are available for students attending a 4-year college or university as well as “vocational, vocational or technical” schools, according to the Department of Education website. You may also hear direct loans called Stafford Loans or Direct Stafford Loans. There are two kinds:
- Direct subsidized loans – After your school determines how much you can borrow based on your financial needs and the loan has been granted to you, the Department of Education pays the interest on the loan while you study for as long as you attend the university at least part-time, as well as the first 6 months after leaving school.
- Direct unsubsidized loans – Unsubsidized loans are not based on your financial need, but your school will determine the amount you can borrow based on tuition and other college fees and any other financial aid you receive. Interest that accumulates on the loan while you are in school is added to the amount you will repay after you leave college.
The main difference between the types of direct loans is the disbursements made by the DOE for the subsidized loans available to students in financial need. You can borrow between $ 5,500 and $ 12,500 in subsidized or unsubsidized loans depending on the year you are in school, depending on DOE guidelines. Federal student aid Office. There are also global lifetime limits, which you can learn more about. here. You can follow the history of your loans and scholarships via the National Student Loan Data System.
Direct PLUS loans
A Direct PLUS loan is available for students pursuing graduate or masters studies or for parents of undergraduate students. They are sometimes referred to as Parent PLUS Loans or Graduate PLUS Loans depending on who the borrower is.
Although a Direct PLUS loan is not based on financial need, the DOE will perform a credit check to make sure you don’t have any money. “Adverse credit history”. If you do, you may still be able to get a PLUS loan if you meet additional requirementsincluding finding an “endorser” who agrees to repay the loan if you cannot or by showing that it exists extenuating circumstances.
Private student loans vs federal student loans
Simply put, the US government grants federal student loans and private student loans to private companies, such as banks or credit unions or other non-governmental organizations. Federal law keeps interest rates fixed. Private loans are generally more expensive, according to the federal student aid office. Other differences include:
- Private loans can have variable interest rates that are sometimes higher or lower than federal loan interest rates depending on a number of factors.
- Private loans cannot be consolidated with federal direct loans. It may be possible to consolidate your federal loans at a private bank. (more on consolidation later.)
- Federal loan programs offer several deferral and repayment options, some of which are tied to your monthly income. The options for deferral of payment or repayment of private loans vary by lender.
If you decide to apply for a loan from a private bank, there are a few important questions to ask:
- Are there loan repayment fees?
- Is the interest rate fixed or variable? If it is variable, how far can the rate increase?
- When should you start repaying the loan and what will the monthly payments be?
- What will the total cost of the loan be, including interest?
- Are there interest rate reductions or deferral options?
Do I have to consolidate my student loans?
Consolidating your loans means combining more than one loan from several lenders in order to have a more convenient monthly payment, but there is advantages and disadvantages of consolidation, according to the Federal Office for Student Aid, including:
- Consolidation can reduce your monthly payments by extending your loan repayment term. But extending the term of your loan will result in more and smaller payments, which means you’ll end up paying more interest overall.
- If you consolidate loans that don’t have income-based repayment options with loans that do, you may be able to pay off the new consolidated loan based on your monthly income. But you could lose other benefits like interest rate reductions.
Be smart about borrowing
It might sound obvious, but another essential aspect of borrowing money to pay for your college education is making sure that you only borrow what you need. While you may qualify for a loan that is larger than what you have to pay for your college education, you don’t have to take the full amount. One of your rights as a student loan borrower is to request a reduction in your scholarship or even cancel it entirely.
You should also research the potential salary you can expect to earn after you graduate and take that into account when deciding how much you can afford to borrow. A useful resource for estimating your future loan burden is the Federal student aid reimbursement estimator, who can give you personalized information about your loans and how different repayment methods may affect your monthly payments.
Joe Cote is a writer at Southern New Hampshire University. Follow him on twitter @ JoeCo2323.