Federal and private student loans are available to help cover the cost of earning a college degree, but there’s a lot you need to know before applying.
The world of student loans can be difficult to navigate, but many students use student loans every year to fund their education. While student loans are a helpful tool, there are also important details that you need to know before applying for a loan.
This guide will explain how student loans work and help you navigate the student loan journey.
What type of student loans can I get?
Student loans fall into two categories – federal loans and private loans. The type of loan you should get depends on your situation and whether you are eligible or not.
Federal loans are the most common type of student loan Because they come with access to benefits and security that are unavailable with personal loans. In general, qualifying for federal student loans is also easy. It is generally better to eliminate federal student aid before turning to private student loans.
There are several different types of loans available with the Department of Education, each with its own criteria:
- Direct Subsidized Loans – The subsidized loans are for eligible undergraduate students and are based on financial need. The Department of Education pays interest on these loans for students when they attend school (at least half the time), during the first six months after leaving school, and in deferred periods.
- Direct Non-Subsidised Loans – Unsubsidized loans are not need-based and are available to eligible undergraduate, graduate and professional students. Students are responsible for paying interest on unsubsidized loans.
- Direct PLUS Loan – PLUS loans are available for undergraduate and professional students, as well as for parents of graduate students. These loans are the only federal student loans that require a credit check.
- Direct Consolidation Loan – A direct consolidation loan allows students to combine several federal student loans into one loan, with a loan servicer and one monthly payment.
private student loans are secured through a private lender such as a bank or other financial institution. Your credit score, credit history and income usually determine whether you will qualify for private student loans. Private student loans are a way to cover the remaining educational costs that federal loans cannot cover.
Qualifying for a private student loan usually requires a hard credit inquiry, which can temporarily drop your credit score. Some private lenders allow you Use a Cosigner to Secure a Loan If you do not qualify for a personal loan on your own. Private student loans can come with fixed or variable interest rates.
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Pros and Cons of Federal Student Loans
Federal student loans have helped many students pay for college expensesBut they have both advantages and disadvantages.
- no credit check required – There are no credit history requirements to qualify for federal student loans, except for PLUS loans.
- no cosigner required – Unlike many private loans, a federal student loan does not require a cosigner to secure.
- Income Driven Repayment Plans – Federal loans offer several payment plan options, including plans based on your income and family size. If you are just starting your career, your pay is likely to be low in the beginning.
- government security – Federal loans come with loan moratorium and access to forbearance options if you have trouble making payments. You may also qualify for loan forgiveness through programs such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness.
- borrowing limit – Most federal student loans have maximum annual and total loan limits. The amount received through federal loans may not be enough to cover all of your education expenses.
- origination fee – Federal student loans have an origination fee. These fees are a percentage of the total loan, so you’ll receive less money than you can borrow to pay for school expenses.
- loan default – If you default on your loan, the government can deduct wages from your paycheck. The government may also garnish your tax return and Social Security benefits in some cases.
Pros and Cons of Private Student Loans
Private student loans also have pluses and minuses.
- not need-based – Personal loans are based on your or your co-signer’s credit, so there is no need to prove financial need to qualify for the loan.
- high credit limit – Private lenders often let you borrow up to the cost of attendance, while most federal loans have strict borrowing limits.
- potentially lower interest rates – You can potentially get a lower interest rate if you have excellent credit and meet the lender’s other underwriting requirements.
- may require a cosigner – Unless you have established good credit, you will need the help of a cosigner with good to excellent credit to qualify for private student loans.
- variable interest rates – Some Private student loans have variable rates, so there is a chance that your interest rate may increase during the course of the payment.
- Do not provide the same benefits and protections – Private loans do not qualify for federal loan forgiveness programs or income-driven repayment plans. They are often less flexible if you encounter difficulty.
How much can I borrow?
When borrowing money for school, you should only borrow enough to pay for school and other educational expenses. The amount you can borrow depends on the type of loan taken by you.
How Much Can I Borrow in Federal Student Loans?
- Direct subsidized and non-subsidized loans – $5,500 to $12,500 annually. Dependent students can borrow up to $31,000 in total, with subsidized loans not exceeding $23,000. Independent graduate students can borrow up to a total of $57,000 ($23,000 maximum in subsidized loans), while independent graduate and professional students can borrow up to $138,500 in total with more than $65,500 from subsidized loans can take.
- Direct Plus Loan – Cost of attendance minus any other assistance received. Schools determine the cost of attendance. Dependent students whose parents do not qualify for the Parent PLUS loan may qualify for additional funding.
How Much Can I Borrow in Private Student Loans?
Private student loan amounts vary by lender but the maximum is usually the cost of attendance. In some cases, lenders may set minimum lending requirements on student loans.
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How Much Do I Have to Pay in Interest on Student Loans?
The amount of interest you pay on student loans depends on whether you have federal or private loans, among other factors. Federal student loans have fixed interest rates set by Congress, which will not change for the life of the loan.
The interest rate on direct subsidized and non-subsidized loans (disbursed on or after July 1, 2021 and before July 1, 2022) is 3.73% for undergraduate students and 5.28% for graduate or professional students. The interest rate on Direct Plus Loan (disbursed on or after 1st July, 2021 and before 1st July, 2022) is 6.28%.
Interest rates on private student loans vary depending on the lender and your credit. Some private student loans come with variable interest rates, so the amount paid each month can change over time. Other factors that affect interest include:
- loan amount – The higher your loan amount, the more interest you will pay each month.
- repayment period – The length of your loan tenure can affect the interest you pay – the longer your loan term, the higher your interest rate. Most federal loans start on the standard 10-year repayment plan, but other federal payment plans can extend the payment up to 30 years. Private student loans typically have repayment terms of five to 20 years.
When do I repay my loan?
At some point, you will need to start paying off your student loans. The exact time to start repayment depends on the type of loan you have taken.
federal student loan repayments
You don’t need to start paying off federal student loans until you graduate or are below half-time. But that doesn’t mean your loan won’t attract interest while you go to school. During periods where payments are not required, interest on PLUS loans and non-subsidised loans still accrues. If you choose not to pay interest during this time, it will accrue and eventually capitalize, meaning the interest is added to your principal balance.
The Department of Education offers several repayment plans depending on your needs and the type of loans you have:
- standard repayment plan – This is the default repayment plan for federal loans. It comes with monthly payments for 10 years or up to 30 years for a consolidation loan.
- graduate repayment plan – The payments on this plan start low and increase every two years for 10 years or up to 30 years for a consolidation loan.
- extended repayment plan – Loan repayments are extended up to 25 years. Payments can be either fixed or graduated, and you must have more than $30,000 in direct loans to qualify.
- Revised pay as soon as you earn the repayment plan – The loan payment is equal to 10% of your discretionary income. The loan terms last between 20 and 25 years. Any balance left over after the loan term is forgiven, although you may have to pay income tax on the amount forgiven.
- Pay As You Earn Repayment Plan – Monthly payments equal 10% of your discretionary income, but never more than what you pay with the standard repayment plan. Any outstanding balance on the loan is forgiven after 20 years. You may have to pay income tax on the amount forgiven.
- income-based repayment plan – Monthly payments are either 10% or 15% of your discretionary income, but never more than what you pay with a standard repayment plan. Any balance on the loan is forgiven after 20 or 25 years, but you may have to pay income tax on the amount forgiven.
- income-contingent repayment plan – The monthly payment is 20% of your discretionary income or less than the amount you pay over the 12-year fixed pay period (adjusted by your income). Any outstanding balance on the loan is forgiven after 25 years. You may have to pay income tax on the amount forgiven.
- income-sensitive repayment plan – Monthly loan payments are based on your annual income, and the balance must be paid in full within 15 years.
private student loan repayments
Private lenders set their own repayment terms. Depending on the lender, you may have the option of choosing your repayment term, starting payments immediately or deferring payments.
Private student loans start charging interest immediately. Common payment plans for private student loans include:
- deferred repayment – With this plan, you defer all your principal and interest payments until after graduation or leaving school.
- interest-only repayment – You can choose to pay interest charges while in school to prevent them from accruing and capitalizing on your loan balance.
- fixed repayment – Borrowers can pay a certain amount each month until they graduate or leave school.
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