Student Loans 101
The two broad categories of student loans are federal loans (or public loans) and private loans. Additionally, each of these has its own subcategories. There are plenty of loan options to choose from, based on the financial capacity of the student as well as their prospective earning potential. Also, different loans come with different terms depending on the education level that the applicant intends to pursue.
Types of Student Loans
As mentioned, student loans fall under two main categories, Federal (public) Student Loans and Private Student Loans.
Federal (public) Student Loans
A Federal student loan is direct financial aid given to college-level students by the United States Department of Education. It is used for undergraduate, graduate, and professional student studies.
Eligibility for a federal loan is determined based on a student’s financial need. The following are the four subcategories of federal student loans:
- Direct Subsidized Loans: These are loans given by the federal government to financially needy undergraduate students who wish to pursue further education at a career school or college. To qualify for this type of student loan, the applicant must demonstrate a need for financial aid.
- Direct Unsubsidized Loans: Direct unsubsidized loans, on the other hand, do not require applicants to show proof of financial hardship. Also, besides undergraduate students, this type of loan may be given to professional students and those pursuing graduate studies.
- Direct PLUS Loans: Direct PLUS loans are designed to cater to any additional financial expenses that a student may have that are not covered under the academic loans mentioned above. As such, they may be granted to a dependent student or their parent/ guardian. Although applicants for this kind of loan are not required to prove financial need, the government will nonetheless run a credit check on the applicant. A good credit score is thus necessary for one to qualify for this loan.
- Direct Consolidation Loans: Direct consolidation loans refer to a situation where an applicant is allowed by the federal government to have all their student loans under one loan. The consolidated loan is then serviced by one individual.
Private Student Loans
Private student loans are offered by non-governmental or non-federal entities such as commercial banks, credit unions, and other financial institutions. Interest on these loans is determined based on an applicant’s credit score and income level. The loan term on private loans is adjustable and may range anywhere from 5 years to 20 years depending on the service provider. Private Student Loans are divided into the following categories
- Degree Specific Loans: A degree-specific private loan is a financial aid that is intended to cater to a particular graduate or undergraduate learning program. Most degree-specific loans finance an applicant through law school, bar exam, medical school, or business school.
- Bad Credit Loans: Bad credit loans are designed to cater to applicants who have a bad or non-existent credit score, but who would rather not go for federal funding. However, given the absence of stringent credit checks, and the applicant’s risk of default, this kind of loan tends to attract a high-interest rate.
- International Student Loans: International Student loans are available for international non-resident students who may require financial aid but are unable to meet the requirements for traditional financial aid. Compared to most of the other types of loans, international student loans may come at a higher interest rate.
- Income Share Agreements: Income share agreements arise where the lender and borrower undertake to share the borrower’s income as a way to repay the student loan. In this case, the lender agrees to take a fixed percentage of the applicant’s monthly income. In the interests of fairness, this kind of agreement also stipulates a minimum and maximum amount payable. That is meant to ensure that neither party exploits the other.
- State Specific Loans: As the name suggests, these are student loans offered by particular federal states to resident graduate and undergrad students undertaking their studies within the state.
How to Choose the Ideal Student Loan
To figure out which type of loan is the best, an applicant needs to make an honest appraisal of several factors:
- Loan Eligibility: What are the pre-qualification criteria demanded by the lender, and does the applicant meet the cut? For instance, if a lender requires proof of creditworthiness, how is the applicant’s credit score?
- Future Financial Burden: An assessment of how much the applicant will need to pay per month. This also includes an assessment of the applicant’s prospective earning capacity.
- Loan Terms and Conditions: Look out for hidden charges, especially in the case of variable interest rate student loans. You may also get a lower APR if you have a co-signer with a good credit score. You may also want to look for forbearance and deferment availability. You can find more details on your conditional documents as part of the loan offer.
- APR: The APR is the final premium you pay for the loan amount. It includes the interest rate and various charges, including origination fees for the loan. Some loans may have low-interest rates but can carry high fees and lower repayment flexibility.
- Repayment Plan: There are different repayment plans for student loans. You can choose a standard repayment plan to pay off your debt as fixed payments for 10-30 years. You can also choose an Income-Driven Repayment Plan, making your loan payments as low as zero if you don’t have any disposable income.
Wrapping it Up
Student loans are often taken by people who seek to finance their higher education and can be a life-long commitment. You can take a federal loan if you are eligible, but it may take time, and the loan amount may not be sufficient. If you have a good credit history or need more than what federal student loans offer, you may approach a private lender or a credit union. You can also choose to refinance your existing loans to get a better interest rate and suitable repayment terms. Many private lenders offer flexible income-driven repayment terms at low APR for financing a promising career. Knowledge is the key!