Considering financing your education with student loans? Here's a starter guide to federal and private loans, including tips for paying them back.
Navigating the world of student loans can be overwhelming. With so many different loans, each with their own nuances, it can be hard to make sense of it all. To help, we've created a bit of a starter guide to the different types of student loans out there, including some basics on how to manage and pay them back. Of course, if you're thinking about opening a student loan, you should talk to your personal financial advisor or your school's financial aid office.
In the United States, there are two common types of student loans: federal and private. Federal loans are lent or backed by the federal government, while private loans are typically lent or backed by banks, credit unions and other private lenders.
Federal loans are generally seen as the better option for most students because of their fixed interest rates, which are often lower than those available through private loans. As long as the borrower is enrolled in school at least half-time, all payments are delayed. And when borrowers do graduate, leave school or drop to less than half-time enrollment, most federal loans have a grace period before they require repayment.
Students who are interested in applying for a federal loan should be sure to visit the Department of Education's Federal Student Aid site for more information about eligibility requirements, loan terms and application instructions.
Here's a quick summary of the four federal loan programs:
- Federal Perkins loans: With the Perkins Loan, the lender is your school, though not every school offers this loan. The loan is available to eligible undergraduate, graduate and professional students, depending on demonstrated financial need (based on your application for federal student aid) and availability of funds.
- Direct Subsidized Loans: Direct subsidized loans are available to eligible undergraduate students who have demonstrated financial need. The federal government pays the interest for subsidized loans while the borrower is in school at least half-time, for the first six months after the borrower leaves school or drops below half-time enrollment and during certain periods when repayment is deferred.
- Direct Unsubsidized loans: Direct unsubsidized loans are available to eligible undergraduate and graduate students, regardless of financial need. With unsubsidized loans, the interest is entirely the borrower's responsibility at all times.
- Direct PLUS loans: PLUS Loans can be taken out by eligible graduate or professional students, or eligible parents of dependent undergraduates. No demonstrated financial need is required; however, borrowers can be denied based on negative credit history. The amount approved will depend on other financial assistance received.
Generally, most students turn to private loans only when they have exhausted their federal loan options and other financial aid possibilities such as grants, scholarships and work-study programs. Private loans often have higher interest rates that are variable, which means the amount you're required to pay back could increase over time if these rates go up. Your eligibility may depend on your credit history.
If you do decide to take out a private loan, here are three key things to keep in mind when shopping around (though you should always carefully review all the terms):
- Interest rate: Interest rates usually vary based on your credit health. You'll usually want the lowest interest rate possible, so a better credit score will likely help here.
- Fees: Many private loans have additional fees. Depending on the lender and the loan, these fees could be deducted from the amount you receive, added to the total loan amount or otherwise charged to you.
- Co-signer: Private loans may require a co-signer to agree to pay back the loan if you are unable to. Having a co-signer with good credit could potentially result in a lower interest rate.
When looking at private loans, other important terms to consider are monthly payments, grace periods and repayment and deferment options. Credit Karma is a great place to start your search for a private loan. Whether you are looking for a new student loan or to consolidate your prior loans, Credit Karma can offer personalized recommendations based on your credit profile.
Paying your loans back
Federal loans typically offer more flexible repayment plans. With either federal or private loans, though, it's important to know the details of each of your loans and to keep careful track of how much you owe. You can use repayment or loan calculators to estimate, based off of basic loan terms, how long it will take to pay off a loan or to see how much you'll need to pay each month, helping you plan for your future.
To make repayment easier and avoid late fees, you may be able to set up automatic payments through your bank or loan servicer. Some servicers even offer an interest rate reduction if you sign up for automatic payments. Bill pay reminders are another way to help prevent missing payments.
Consolidating your loans may also make repayment easier, but there are tradeoffs. While consolidation can lower monthly payments, it can increase the repayment period, which means you could be paying more in total.
What if I can't make my student loan payments?
With both private and federal loans, you may have options to postpone making payments for a period of time. In some limited cases, your student loan could be completely or partially forgiven, although this is typically quite difficult to do so. Federal loans may offer more flexibility when it comes to deferment or forbearance. If you are having trouble paying, consider contacting your loan servicer in order to determine which options you may have to avoid defaulting. Failure to pay back a loan can severely hurt your credit and lead to wage garnishment or your account going into debt collection, among other negative consequences.
Taking out a student loan is an important decision for many and it's easy to get lost in all the detail and jargon. Understanding your student loans and repayment options early, before you're required to make your first payment, could save you a lot of confusion and stress down the line.
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