Unless you are from a wealthy background, you should know by now that paying for college isn’t usually easy. There are many ways you can afford your college education. Financing your studies could be from scholarships, college savings, or grants.
Although some institutions may provide financial assistance, student loans can help you pay for college if you don’t have other options. Around 70% of students in the US borrow money to pay for their school-related expenses. By the end of this report, you will be able to answer the following questions;
- What are student loans?
- Types of these loans?
- How much will it cost you?
- What is the maximum amount you can get?
- Advantages and disadvantages of student loans
- Final thoughts.
What are student loans?
A student loan is money you borrow to help pay for school expenses with the agreement to repay in the future with interest. These school expenses could be tuition fees for the entire program, accommodation, and other minor costs.
If you are exploring student loans, your first option should be from the government. College loans from the government have a much lower and fixed interest rate than private student loans. So make sure to explore the federal student loan option before looking elsewhere.
Types of student loans
Before taking up a student loan, you should at least know the different options available to you. You can take out two main types of student loans: private loans and federal loans.
Private Student Loans:
Private loans are loans from any lender other than the government, including businesses, banks, credit unions, and the school you’re attending itself. The terms of the loans are set by the lender and can vary widely between different loan providers.
Private loans can either have variable or fixed interest rates. It means that your interest rate can depend on you, your parent, or another cosigner’s credit score. Private loans are also typically unsubsidized, which means that you’re responsible for all the interest that accrues on your loan. It also includes the interest that accrues while in school.
Private loans are taken out with a set repayment term, usually anywhere from five to 20 years. These loans are typically not eligible for student loan forgiveness programs or government-backed repayment programs designed to lower your monthly cost.
Keep in mind that private loans can have interest rates that can change throughout your loan repayment. You might start with a lower rate of 3% only to find yourself paying as high as 13% after a few years.
For comparison, federal student loan interest rates for undergraduate students are usually no greater than 5%. Lastly, private loans can be refinanced, meaning you can get a lower interest rate, depending on your score, salary, and other factors. They can be a gamble that you can win or lose.
Public or Federal Student Loans:
Federal student loans are loans funded by the federal government. There are three types of federal student loans for undergraduates: direct subsidized loans, direct unsubsidized loans, and Direct PLUS loans for parents.
Subsidized means the government pays the interest that accrues on your loans while you’re in school or deferment. Unsubsidized loans accrue interest that you will eventually have to repay, even while in school. PLUS loans are taken out by your parents. Only your parents are liable for repayment even though the loan was for your studies.
Read More: Subsidized Vs Unsubsidized Student Loans.
You have to fill out a FAFSA form or a Free Application for Federal Student Aid to get federal student loans. It’s important to remember that all federal student loans have a fixed interest rate. Currently, that fixed interest rate for undergraduates is 4.53%.
There is no credit check for a federal loan except for PLUS loans because the interest rate is fixed and does not depend on your credit score. Most importantly, federal loans have many options for repayment and even postponement in terms of financial difficulty.
How much do student loans cost?
With every loan comes a repayment schedule. Knowing how much you have to repay every month is vital to your future planning. After graduation or the duration of your studies, there are monthly repayments you must make on your outstanding college loans.
Depending on the total amount you borrow, the average repayment on student loans is around $400. Although this amount is the average, your monthly repayment could be way higher or much lesser. But what is the cost of a student loan?
There are a few essential factors that determine how much your student loan repayment will cost you. These factors will help you calculate the exact cost.
Origination fees are a one-time cost that the lender adds to the requested loan amount. Unlike federal loans, most private student loans don’t have such fees. If you choose federal loans, the origination fee is between 1% to 4%. It means you will owe an additional 1% to 4%, which can quickly impact your repayment plans depending on the total loan amount.
The interest rate on your student loan also affects how much this loan will cost you. If your student loan term is short, you will pay lesser interest and vise versa. In a nutshell, interest rates play an important role in determining the cost of college loans.
How will interest add up:
Although you only start repaying your student loan after your graduation plus six months grace period, the interest never stopped piling up. The interest rate on your college loan kicks in immediately after you receive the loan. So when you start the repayment schedule, you will owe more than what you started with.
How much can you get on a student loan?
Although you can get the total cost of your studies until graduation, student loans have a maximum limit. This limit depends on a few factors, like the type of student loan you opt for and the duration of your studies. The amount you can borrow also depends on whether you are an undergraduate or a graduate student.
As an undergraduate, you can borrow up to $12,500 annually and a total of $57,500 in federal student loans. The amount you can get from private student loans varies from lender to lender. Most private lenders set a lifetime limit you can never exceed. Although it might be tempting to ask for a little more, never borrow what you don’t need.
On the other hand, if you are a graduate student and wish to further your studies, you can borrow up to $20,500 annually and $138,500 in total. Again, only borrow what you need and can afford to pay back.
Before considering loans from private lenders, you should max out federal student loans since they have a subsidized amount. The government pays the interest with subsidized loans while you are still in college at least half the time. The government could also pay the interest rate in your grace period after graduation.
Pros and Cons of Student loans
If your decision to take out a student loan is still concrete, you should know the advantages and disadvantages. Knowing the pros and cons will help you make an informed decision on whether you should even consider the loan in the first place. Now let’s start with the pros:
- With student loans, you will have the opportunity to afford college if you can’t meet up with the expenses.
- You can attend your dream college depending on the amount you can borrow.
- Paying off your student loans builds up your credit.
- It is possible to use student loans for other things besides tuition and accommodation. But a wise choice should always be something related to your studies.
- Student loans are expensive since the interest starts piling up on the first day of getting the loan.
- Just the idea of starting your life with debt after graduation is horrible.
- You will have to make too many sacrifices in life to repay your debt.
- It is not easier to get out of a student loan, and defaulting will leave you with a bad credit score.
Federal student loans are the best choice to consider. But if you have exhausted your federal loan limit, you can check out private college loans. It could be a wise choice to answer a few questions before ever taking a personal loan. These questions are;
- What is your career path?
- Are you really interested in this career path?
- How fast can you get a job or kickstart your career?
- What is the minimum salary you can expect once you get a job?
- How long will it take until you can be debt-free?
Check out the federal student aid if you’re comfortable with the answers and are ready to apply for a loan. For private student loans, check out the loan offers below.