Student loans can be a complicated burden but for many people getting a student loan is the only way they can pursue a higher education degree. Here we’ll look at education loans and the fastest way you can pay off your loans.
The average cost of attending college is continuing to rise today. With average in-state tuitions reaching nearly $90,000 for four years and nearly $200,000 for four years of private schools; understanding student loans and who they are for is incredibly important. Knowing what you need in a loan and how it is intended to be paid back is as important today as ever before. Let’s look at the basics first.
What are Student Loans?
Student loans are specialized loans that are given specifically for the purposes of higher education. They are typically large enough to not only cover the cost of tuition but also the costs of room & board, taxes & fees, health insurance through the school, and other necessary expenses like school books. The best student loans offer everything ranging from undergraduate, graduate school, doctoral programs, and professional schools like medical school, law school, business school, etc.
Student loans are a bit different than traditional loans as they don’t require collateral the way other loans do. These are called “unsecured loans” and mean that your parents don’t have to use their home as collateral to send you to college and some don’t even look at credit scores for approval.
Private Student Loans vs. Federal Student Loans
Private student loans, not the best student loans to have, are usually provided by traditional banks and credit unions. They vary from federal in a few ways and one of those ways is that qualifying is based on your income and credit levels (or that of your parents). These loans often have higher limit amounts and can typically cover four years of school even at private schools.
Federal student loans are a bit different than privately provided loans. First of all, they are provided by the US Department of Education (an agency of the federal government). You can obtain one directly from the Dept. of Ed but also through partner banks and credit unions. Some universities themselves will provide these student loans to provide better loan opportunities to their attending students.
Most federal student loans are provided through a “Stafford Loan” through the program Direct Loan. There are 4 different options:
- Direct unsubsidized loans
- Direct subsidized loans for undergrads meeting certain financial need requirements
- Direct consolidation loans (where graduates can consolidate their loans into a single loan)
- Direct PLUS loans (for parents or guardians of undergrads, graduate students, or specialized students like law students)
- Applicants are required to fill out the FAFSA (Free Application for Federal Student Aid) form. This is where the entire federal student loan process begins.
Who Needs Student Loans?
If you plan on attending college but do not have the available funds to pay out of pocket, you likely need to look into receiving the best student loans. So if you and your family don’t have the financial resources to pay for college, you likely need a student loan. It could be for the entire length of school or for a single academic year, it really depends on your individual needs.
Qualifying for the Best Student Loans
Federal loans through the FAFSA program don’t require any specified income or credit levels in order to qualify. They also do not require a cosigner or collateral to qualify. These are social programs created specifically for those who are unable to qualify for privately offered student loans.
Private student loans require much of the same prerequisites that traditional private loans do. Income and credit history is important and will need to be at the level to cover the loan payments as well as any other household finances (like a mortgage). You can qualify on your own or with the aid of a cosigner (most common) – having a cosigner will help you get the best student loans.
Variable vs. Fixed Student Loans
The best student loans are given in two varieties. A variable loan has interest rates that change with the interest rates of the market while fixed loans have a fixed interest rate for the entire length of the loan. Usually, variable rates are lower but fixed-rate loans can be lower over time if the market goes through a substantial rate increase at some point during the loan length of time. Federal loans are only fixed. Private student loans can be either-or.
Federal and private will have varying maximum amounts. Federal loan maximum amounts are usually between $30,000 and $60,000 for undergrad and jump to about $140,000 for graduate student loans.
Private student loans are provided by private companies and have higher limits from $100,000 to $500,000. But some lenders will also be willing to provide a loan higher than that depending on what the cost of education will be for a particular person.
It’s very common for students to have a combination of federal and private student loan amounts to cover all of their costs and expenses when attending school. Having a combo of both can sometimes create the best student loan strategy you can have.
Private loans typically don’t have any origination or other variety of fees. Federal student loans on the other hand have origination fees that range from 1% to 4.3% of the total loan amount.
Private loan terms range from 5 years to 20 years on average. Federal student loans are longer and range from 10 – 30 years typically.
APR, or Annual Percentage Rate, for Federal student loans typically range from 5% to 8%. APR rates on private student loans can be lower or higher, ranging between 2.5% to 12%. So there are some other differences here from Federal to Student and you should look at the pros and cons of both.
Deferment is essentially a grace time period where you are not required to start paying back the loan. Federal education loans usually have a deferment of 6 months after graduation so you don’t need to start paying the loan off until 6 months post-grad (but interest will accumulate during this time period).
Private education loans have more variety when it comes to deferment options. Some will allow deferral until after you graduate while others may have a minimum monthly payment required. Be sure to look carefully at the options of any particular loan you’re considering.
Federal student loans don’t usually have a cosigner so there is no need for a “cosigner release” down the road.
Cosigners are very common for private loans as most people applying to go to school don’t work full time or have assets to use as collateral to the loan. Having a cosigner release provision is something to be looking for because this lets you continue using the loan while at the same time releasing your cosigner from any liability or requirements to pay down the road. The caveat is that in order for the lender to release your cosigner you need to have enough financial resources to carry the remainder of the loan and make payments on time for 2 – 4 years.
Forgiveness and Forbearance
Federal loans have loan forgiveness and forbearance options should you need them. Payments can be reduced to as low as 10% of your total monthly income. If you work for a government agency or certain nonprofit organizations and make 120 monthly payments while working full time, your loan may be completely forgiven meaning you don’t pay any more than you already have.
Private education loans on the other hand don’t have any sort of forgiveness as an option. Some may offer forbearance during hard economic times but every loan and every lender will have different stipulations for this sort of thing.
Student Loans Summary
Perusing higher education is part of the fabric of modern life, especially here in the United States. The market is vast and education loans can be rather complicated so it’s important to get some expert help where you can. When looking for loans, read the fine print and don’t jump into anything without knowing all of the facts. It’s tough to plan your life when you’re 17 or 18 years old and university is just one option for your future. So keep your doors open and be smart about where you put your time, effort, and money.