While borrowing money to fund your college education may be unavoidable, there is a lot you can do to reduce the impact of the loan on your personal finances. It all starts with understanding the basics of student loans—the terms involved, the different types of loans, when and why you may need a co-signer, and much more.
Types of Student Loans
There are two types of student loans—federal student loans and private student loans. Both of these are distinctly different from each other in every way, from the issuing authority to the qualifying criteria, interest rates, and repayment terms.
- Federal student loans – Federal student loans are issued by the federal government. They have more favorable terms in that they have lower rates of interest, and more flexible repayment terms and offer relief if necessary. You must fill the FAFSA in order to pursue federal student loans. The four main types of federal student loans are Direct Loans, Perkins Loans, Stafford Loans, and PLUS Loans.
- Private student loans – Private student loans are issued by banks and other private financial institutions. These loans typically come with much higher interest rates and offer little or no flexibility or relief from their original terms even if you are having difficulty repaying.
Subsidized vs Unsubsidized Federal Student Loans
The interest rates on federal student loan can be either subsidized or unsubsidized. Subsidized loans do not accrue any interest while you are still in college. They only start to accrue interest after you graduate.
Unsubsidized loans on the other hand start accruing interest from the date you get the money and continue accruing interest while you remain in school.
Fixed vs Variable Interest Rates
If a loan has a fixed interest rate, it means the rate of interest will remain fixed over the life of the loan so you know exactly how much you have to pay back every month.
If a loan has a variable interest rate, the rate may vary considerably depending on market conditions. It could work to your advantage and you may end up paying a much lower rate of interest but it could swing the other way too and that is a risk you have to take.
Federal student loans are typically fixed rate loans, whereas private student loans may be fixed or variable rate loans.
Standard Repayment Term
The standard repayment term for federal student loans is 10 years. You do have options to switch over to an income based repayment program or you may qualify for loan forgiveness depending on your choice of career.
With private student loans you are tied in to your initial agreement with the lender. Any flexibility or forgiveness will depend on the lender.
What Is Co-Signer? Why Would You Need One?
Federal student loans are offered based solely on a student’s financial need. Private lenders however only agree to loan money based on the borrower’s credit history. If you have not had the chance to build your credit history, a private lender will only approve your loan if you have a creditworthy cosigner.
A cosigner does not necessarily have to be your parent. It can be anyone who has good credit history and who is willing to cosign your loan. What this means is, if you default on your loan, the cosigner guarantees that they will repay the outstanding balance.
Use College Raptor’s free Student Loan Finder to compare lenders and interest rates side by side!