- August 21, 2018
- Posted by: Michele Crew
- Category: College, Economics, Finance & accounting
With the excitement of college, comes the stress of how to pay for it. After grants, scholarships and college savings are exhausted, it’s time to turn to student loans. Just like any other loan, it’s important to be informed and make economical decisions.
According to Economic Studies at Brooking, approximately $1.4 trillion, outstanding student loan debt has become the second largest source of household debt.
To understand what you’re borrowing, it’s first helpful to know the difference between federal and private loans, as well as repayment options and loan details.
Often preferred over private options, federal loans have low interest rates and flexible repayment plans. After graduation, there is a 6-month grace period before you begin making payments. Repayment options are offered based on your income, and the plan is reviewed once per year afterwards. If you’re in a position where payments cannot be made, deferment is an option but to be used wisely. Remember: If you aren’t making payments during deferment, interest will continue to accrue.
Federal loans are available in two ways: Subsidized and unsubsidized.
- Subsidized: The loan doesn’t accrue interest while you’re at least a half-time student or in a deferment period.
- Unsubsidized: This loan will accrue interest as soon as you take it out and will continue through the life of the loan.
The disadvantage of student loans is they cannot be erased from your credit report in the event of bankruptcy, so it’s important to avoid going into default. Defaulting on federal loans can result in the loan going to collections and garnishment of your wages and tax refunds.
Nearly any student can be eligible for federal loans. However, there’s only a limited amount of money you can borrow in federal loans per school year. Click here to see what you could borrow. Interest rates can range from 3.86%-6.41%, depending on which loan program you’re in.
Private loans can be more costly than their federal counterparts and the repayment options aren’t typically as flexible. If you’re in financial hardship, you may still be obligated to make your payments without a deferment option. Just like federal loans, you have a 6-month grace period before you begin repayment.
Before an approval decision is made, the lender will run your credit report to determine if you’re eligible to borrow. You can take out larger amounts with private loans, but it’s recommended to take what you need to pay for school because these loans are unsubsidized. Interest could be higher than federal loans, but is dependent on your credit score. Remember: Monthly payments and interest rates are variable with private loans, which means the terms can change month by month with little or no warning.
If you’re in need of private student loans, click here to find some of the best known student loan organizations.
Making educated and informed decisions to borrow student loans can be key in preventing financial issues and possible default.