What To Know About Student Loans
When considering student loan options for funding higher education, a young man needs to be aware of the options regarding loan types and repayment. By making the right choices from the start, managing loan debt after graduation doesn’t have to be a burden. Student loan repayment can be managed successfully when borrowers make educated and informed decisions from the start.
Types of Federal Student Loans
There are several types of federal student loans available. Here are the options:
Stafford Loans, Subsidized and Unsubsidized
These loans are federal loans that come from the government.
Subsidized Stafford Loans require payments after graduation at a low interest rate (below 4%). Anyone is eligible to apply. The borrowing limit is different for those claimed as dependents compared to those who are independent. The area of study also determines borrowing limits. Independent borrowers are allowed to borrow higher amounts.
Unsubsidized Stafford Loans are for borrowers with families earning an income below a specific amount. There is a limit on the amount that can be borrowed, however, and students cannot exceed 23,000 as undergraduates. Only students from low income families are eligible.
PLUS loans are granted by the Department of Education. Eligibility depends on credit history and the amount is determined by the “cost of attendance minus any other financial aid received.” Parents can borrow on behalf of a student if the student is dependent. If not, then the student can apply independently. There are also Grad PLUS loans for graduate students borrowing as independent.
These loans have a low interest rate, but it’s slightly higher than Stafford loans. There is no limit for borrowing and funds can cover “educational expenses not covered by other financial aid.”
Other Loan Types
The Perkins Loans is for students with exceptional financial need. Currently, the availability of these loans is in question because of changes underway. September 30, 2017 is cited as the date these loans will discontinue.
Direct Consolidated Loans
The federal government offers direct consolidated loans allowing the borrower to combine all federal loans into one, which would require only one payment per month. This option comes with several federal loan advantages including optional repayment plans and forgiveness programs, but not all apply. The greatest benefit in this option is that it simplifies repayment into one monthly amount due.
Other Loan Types: Private or Personal Loans
Private or personal loans for funding education are an option, but the advantages that come with federal loans do not apply to these types. Federal loans come with low interest rates, deferments or forbearance options and loan forgiveness programs. Unlike Stafford loans, personal or private loans require an established and positive credit history for approval, which may impact eligibility.
Loan Balances and Interest
When making student loan payments, money is applied first to the interest and then to the principal. The principal is the amount actually borrowed. When making a late payment, the late fee is paid first, then the interest is paid, then the remaining payment is applied to the principal balance. As the principal decreases over the length of the loan, the interest decreases as well. This means payments will eventually go mostly to the principal balance as the borrower reaches the end of the loan payment agreement.
Paying Loans Ahead of Schedule
Some may think that paying off student loan debt ahead of schedule is a smart thing to do. With student loans, this isn’t always the case. Students loans are at a fixed rate, meaning the percent of interest will not increase. If a graduate is hired by a company that offers retirement plans that contribute matching funds, it’s a financially smarter decision to increase contributions since employers often match employee contributions. This leads to a higher retirement fund balance.
There are several repayment options to consider when the time comes. The good news is that a change of plans is possible without a cost to the borrow. Currently, the following options are available:
- Standard Repayment Plan
- Graduated Repayment Plan
- Extended Repayment Plan
- Revised Pay as You Earn Repayment Plan
- Pay as You Earn Repayment Plan
- Income-Based Repayment Plan
- Income Contingent Repayment Plan
- Income Sensitive Repayment Plan
Deferment, Forbearance and Forgiveness
There are different ways to deal with financial difficulties when it comes to meeting the monthly loan payments after graduation. Deferment and forbearance are two options for having loan payments temporarily suspended. There are also Loan Forgiveness Programs, which reduces the total amount owed for those meeting the different programs’ criteria.
Recent Updates to Federal Loan Availability
According to Forbes.com, federal loans and forgiveness programs may experience a deep decline in funding. This will impact federal loan distributions, work study programs and forgiveness programs.