College and University Blog
What You Should Know About Student Loans
When your savings, grants, and scholarships don’t cover the cost of attending college, student loans can make up the difference. There are a couple of different kinds of loans: federal loans, private loans, and consolidation loans.
Federal student loans are the largest source of educational loans. You can get these loans through private financial institutions. There are three types of federal student loans:
- Stafford Loans are fixed-rate, low interest loans available to undergraduate students attending accredited schools at least half time.
- Perkins Loans are a low interest loan for undergraduate and graduate students with “exceptional” financial need.
- Parent PLUS Loans are a low interest student loan for parents of undergraduate, dependent students.
The terms of student loans available under federal programs are very attractive when compared to most borrowing options—lower interest rates, postponement of payments, longer repayment terms, and less stringent credit requirements.
Private student loans provide additional funding after a borrower has maximized his or her federal loan eligibility. You can get these loans from your school or from private financial institutions. Depending on the lender, private loan terms can vary considerably based on your credit history. You should only use private student loans as supplemental funding after you have exhausted all other sources of financial aid. As with any student loan, be conservative and only borrow what you absolutely need. If you do not have an established credit history, you may still qualify for a private student loan by applying with a cosigner. Having a creditworthy cosigner with a credit rating that is better than yours may lower your interest rate and loan fee.
Loan consolidation refinances multiple loans into one new loan with a new repayment term, monthly payments, and interest rate. Student loan consolidation may save you money if you’re already paying back student loans or are in your grace period. Consolidating your student loans can significantly reduce your monthly student loan payments. That’s because loan consolidation lets you stretch your repayment period from the standard 10 years to up to 30 years, depending on the amount of your student loan debt. The lower payment means you’ll have more money for other expenses. Extending the repayment period increases your total interest payments because you’ll be making smaller payments over a longer period.
If you must borrow, borrow only what’s necessary to cover your college costs (tuition and fees, housing, meals, books, personal expenses, and transportation). Remember, when it’s time to repay, you’ll have other financial obligations, like rent. Financial professionals recommend that monthly student loan payments be no more than 10% of your monthly income (before taxes). Lenders will charge interest for the use of their money and to cover the cost of servicing your loan until it’s paid off. The total interest you pay depends on several factors: the loan amount, the interest rate, and the time in repayment. Lowering or shortening any of these factors will save you money.
The interest rate on federal student loans is established when your loan is first disbursed and varies by loan type. Interest rates on private student loans are variable and are based on the borrower’s credit rating. When you receive your funds, you may notice that they’re less than you thought – Fees, which vary by loan program and lender, have been deducted from your loan proceeds.
You have rights and responsibilities as a borrower.
- Your rights as a borrower include:
- You may accept all, some, or none of the loan funds offered.
- You are entitled to a copy of your promissory note outlining the terms and conditions of your loan. You will receive it before or after your loan is made.
- Your loan holder is required to give you a repayment schedule, detailed information about interest rates, fees, and your balance, and your repayment options before you begin repayment.
- You have a right to defer payments for certain defined periods or to request a forbearance if you qualify.
- You may be able to repay under a graduated or income-based repayment plan.
- You may prepay in whole or in part at any time without penalty.
- Your responsibilities as a borrower include:
- You must notify your school if you want to borrow less than the amount that has been awarded.
- You must repay your loans on time and in full even if you don’t finish your education, get a job, or feel satisfied with the education you received.
- You must notify your loan holder immediately of any changes in your name, address, telephone number, or social security number
- You must make scheduled monthly payments even if you do not receive a bill or coupon booklet.
- First-time Stafford and Perkins borrowers must receive loan counseling before funds can be disbursed.
Managing your student loans will be easier if you use one lender for all of your student loans. It is your right and responsibility to choose the lender of your student loans.
Loan repayment usually starts after you graduate. If you leave school—or suspend your studies beyond the grace period—you will be required to start repaying your student loan. There are a variety of payment plans. You can pick the one that works best for your situation and change it if needed. Payment plans include: standard repayment, graduated repayment, income-sensitive repayment, extended repayment, and consolidation.
If you can’t meet your repayment obligations, you have a few choices. Depending on your situation and on your loans, you may be able to lower monthly costs, request a deferment, or apply for a forbearance.
Deferment lets you temporary suspend loan payments. You may be granted a deferment for a variety of reasons: economic hardship, unemployment, military deployment, enrollment in school, or other similar situations. You are responsible for paying your educational debt even when granted deferment. Deferment is temporary and limited for specified time frames. If you’ve already had one deferment, you may be eligible for the same type again. In other cases, you may have exceeded the time limit on a particular deferment and may no longer be eligible to apply for that same type.
A forbearance can help you avoid delinquency and default if you’re facing temporary financial difficulty. Forbearance lets you suspend or reduce your payments under certain circumstances and for specified periods of up to one year at a time. During forbearance, you will receive quarterly interest statements and have the option to pay the accrued interest. If you don’t, any unpaid accrued interest will be capitalized.
You have numerous options when it comes to student loans. Make sure you are informed of your options and choose the best one based on your personal situation. Borrow only what you need – you will have to pay it back. If you find you are having difficulty with repayment, contact your loan company right away. Ignoring this obligation can prove to be quite costly.