The Positive And Negative Side of Student LoansSubmitted by Blue Mountain Investment Management LLC on August 16th, 2020
What Are Student Loans?
Student loans are a type of credit that helps students pay for their education. It is usually used in a post-secondary institution (colleges and universities). This loan also used to pay off living expenses, books and supplies, or fees pertaining to higher education.
There are many reasons why a student would take out a student loan. However, the top reason is that they are not financially stable to pay off college tuition and fees on their own. Although each college student is different--whether you could afford it or not, everyone is aiming for the same goal which is to be successful in their future endeavors. Sometimes achieving our goals, we must sacrifice and endure setbacks (debt) in the present so that we can slowly start paying off our loans.
Two Major Types Of Student Loans: Federal vs. Private
Federal Student Loans
Federal loans are created and funded directly from the federal government. In order to see if you qualify for any allocations, you must apply to the Free Application for Federal Student Aid (FAFSA).
FAFSA has a variety of loan programs that are awarded based on the different criteria each program requires and how much a person is in need of financial aid. The following table below indicates the top federal loan programs issued:
Direct Subsidized Loans
This is available for undergraduate students who are in need of financial assistance and are excused for not paying any interest charges on the loan while in school.
Direct Unsubsidized Loans
Both undergraduate and graduate students can apply but must meet the eligibility requirements. This type of loan you do not need to prove financial need.
Direct (Parent) PLUS Loans
Only available for graduate students and parents. If a student is behind on paying for tuition, fees, etc. a parent can apply for a loan to help out their child. Certain eligibility must be met.
This loan is available for undergraduate and graduate students with unprecedented financial need.
Federal student loans have interest rates and fees that are fixed at the beginning of each academic year (term/semester). Repayment of federal student loans fluctuates due to having a wide range of options that the borrower could do.
Forbearance and Deferment Options
Discharge in the Event of Loss or Disability
Refinancing Federal Loans to Private
Private Student Loans
Private loans can be used to pay for college just like federal loans. However, the main distinction between the two is that private loans come from banks, credit unions, or state-based/affiliated organizations. It also requires the person to have credit and an income review so that they have some kind of proof that they can pay back the lender.
Types of Private Student Loans:
1. Private Undergraduate Student Loans
2. Private Parent Student Loans
3. Private Graduate Loans
Private undergraduate student loans work just like any other loan, meaning that a background check must be done and the borrower must have a cosigner. The reason why there has to be a cosigner is because it will affect your interest rates. Private parent loans are when the student’s parent or guardian helps them pay for school and is not obligated to pay it back--it will automatically be the parents obligation. Private graduate loans are specifically for upperclassmen and it works just the same as undergraduate loans.
Private loans are not affiliated with the government. So, private organizations can donate a scholarship in their name to universities they want to support. There are many different private loans that each student has a chance to apply for because most loans are for a specific major.
When it comes to private loans, it can be both a variable or fixed interest rate depending on how much the lender is willing to give it. If a borrower has a credit score that is high, he/she can qualify for lower interest rates and vice versa for borrowers with a low credit score.
If you are a student who is deciding on whether to apply for federal or private loans, you need to understand how both types of loans work. Federal loans are usually the most favored one due to it being easier to obtain and manage while private loans have more requirements and eligibility, but are still worth it. Depending on what direction you choose, it is always a safe call to do a thorough research on taking out any kind of loan because it does affect your future.