If you’re shocked at the cost of college or trade school, you’re not alone. Every year, the cost of attaining a higher education gets higher, creating a need to seek additional financial resources. One of these resources – student loans. While there is often a word of warning attached to acquiring student loans, this is a viable option for getting the money you need.
There are two types of student loans – federal and private.1 Here are a few differences:
Federal loans are issued by the federal government. They are easier to repay and the accumulated interest rates are usually lower. While many students are eligible for these loans, there are limits on the amount of money that can be borrowed.
Federal loans have a 6-month grace period after leaving school to repay the loan, and there are additional options for deferment available if the student has a financial hardship. Monthly payments may also be flexible. These loans may be eligible for debt forgiveness based on the career or type of service the student pursues (for instance those that enter into teaching, military service and other types of public service).
There are four types of federal loans:
A subsidized direct loan is for undergraduate students who indicate financial need based on their Federal Aid Form for Student Assistance (FAFSA), which all students are required to complete. The school determines the amount a student can borrow and the Department of Education pays the interest while in school at least half-time, during the first six months after leaving school, and during any period of deferment (postponing payments due to financial hardship).
These types of loans are available to both undergraduate and graduate students. The school also determines the amount that can be borrowed. The interest accumulated on an Unsubsidized Direct Loan is responsible for being paid by the student during all time periods. The student may elect to defer interest payments, but this interest will be capitalized and added to the principal amount of the loan.
The Perkins Loan is a federal loan available to undergraduate, graduate and professional students who have exceptional financial need. There is a fixed interest rate of 5 percent. One of the most distinguishing differences is that some schools do not participate in the Federal Perkins Loan Program. When acquiring the loan, students will make payments to the school, as they are usually the lender. Funds under this program are also contingent on availability.
Parent or Grad PLUS Loans
These loans are available to graduate students, or to parents whose students do not qualify for financial assistance. Parents who obtain a PLUS loan are responsible for paying the loan.
Interest rates for these loans range from 3.86% to 6.41%, with a loan fee of 4% on PLUS loans, and 1% fee for other Direct Loans.
Private loans are exactly that – private. They are usually distributed through a banking institution or private lender and generally cost more than when acquiring a federal loan. The terms and conditions of these loans also vary, and interest rates and payments could change without warning. These loans typically allow applicants to borrow larger sums of money.
It is very important to note that with private loans, interest is charged while the student is still in school. These rates vary based on credit and other factors, and there are usually a number of fees attached, including an origination fee. In most cases, a co-signer is required.
When taking out student loans, it is important to evaluate your options and only borrow what is needed, rather than accepting anything you have access to. Student loans can quickly accumulate into serious debt, which hinders the progression of the student as they move into their career.
That being said, when handled appropriately, student loans are a good financial solution for those who wish to pursue their education and do not have the financial means. A good rule of thumb is to keep your total student loan debt less than your estimated first year salary upon graduation.
As the cost of higher education continues to rise, knowing the types of student loans available to you and working out a plan for immediate repayment prior to obtaining the loan will be beneficial in the long run. Exercising caution is key.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.