Attending college requires spending thousands of dollars each year. Most families do not have the required financial strength to send their children to college. The federal government is aware of this, and has created several student loan programs to help individuals attend college and get an education.
Other financial institutions such as banks and credit unions also offer student loans for families who do not qualify for federal assistance. However, they do not carry the same benefits people might enjoy with federal student loans. In this article, we explain how student loan works and what it takes to submit an application.
The basics about student loans
Student loans are designed to help individuals fund college expenses. They are offered by the federal government, as well as private financial institutions. However, unlike other forms of unsecured funding, student loans must abide by certain regulations.
Student loans differ from other funding sources in several ways. First, they have lower fees and interest rates than other loans. Those interest rates are regulated by government policies and stay the same regardless of financial history. Most student loans have fixed interest rates, which can be subsidized or paid by the government under certain conditions.
Second, student loans have lower approval requirements. In general, most students do not enjoy a good salary or have extensive credit histories. This would make it difficult for them to receive funding. However, most student loans are guaranteed by the government, which reduces risk. This only applies to federal student loans, as private ones often come with less benefits and higher interest rates.
Finally, student loans often come with several borrower-friendly benefits to reduce the financial burden of monthly payments. Student loans obtained through the Department of Education have the most benefits, though some private lenders also provide them. The most common benefit of student loans is delayed payment. This means borrowers will not start paying back the loan until they finish their degree and get a job. In some cases, the federal government will cover interest payments during that period to make sure loan balances do not increase.
Another common benefit is known as deferment. This feature allows borrowers to halt loan payments while they are unemployed without facing a loss of credit score, late payment fees or penalties. However, there are some caveats to keep in mind. First, despite pausing payments, lenders might still charge interest during this period. Also, borrowers must apply and qualify for deferment before they stop making payments. The length of deferment is usually six months, although it can be renewed several times as long as borrowers still qualify for the benefit.
People who have taken out student loans may also qualify for certain tax breaks and deductions. For example, borrowers can deduct up to $2,500 each year from their loan interest. However, people who earn more than $65,000 each year will not qualify for the full deduction. Instead, the amount is determined by a tiered system according to annual income.
The difference between private and federal student loans
Student loans are offered by the federal government as well as private financial institutions. However, over 92 percent of borrowers have student loans issued by the federal government. This is because such loans have more generous benefits compared to those issued by private institutions.
The majority of students borrow from the federal government to cover most college expenses. If anything else arises during their college stay, they often turn to private lenders to cover the difference. Banks, credit unions and online lenders are among the list of institutions who are willing to help students fund their college studies.
The main difference between federal and private student loans is their terms and benefits. Federal student loans are designed to meet the needs of students. They also come with additional safeguards to protect their financial stability, such as deferment or loan forgiveness.
In contrast, private student loans are just unsecured loans offered to students. They often come with higher interest rates that match other funding sources and have less generous repayment options. Also, unlike the federal government, private lenders require good credit and sufficient income to meet monthly payments. Most students have no income until they graduate, which means they must rely on their parents or friends with good credit histories to co-sign the loan.
Private student loans often come with no deferment, loan forgiveness or delayed payment option. This makes them best suited for graduate students who already hold an undergraduate degree and have steady income. In general, the federal government offers less benefits to graduate and postgraduate students.
However, some federal loan programs are still preferable over private loans if the borrowing amount is sufficient to cover the cost. Federal direct unsubsidized loans, for example, offer up to $20,500 per year, which may not be enough to cover tuition for a graduate or postgraduate program. In such cases, students may need to complement federal funds with a private loan.
Types of student loans
Not all student loans offer the same perks and benefits. The federal government, as well as private institutions, have different loan offers that adapt to what students need. The federal government handles three major student loan programs designed to help undergraduate, graduate and postgraduate students receive funding.
The first type is known as Perkins loans. They are the optimal choice for undergraduate students who do not have steady income. Perkins loans come with low, fixed interest rates and are made available to all qualifying students regardless of credit history. However, like Pell Grants, Perkins loans are awarded based on financial need. Funding is limited and only low-income families who cannot afford traditional loans are considered.
An undergraduate student who is awarded a Perkins loan can receive up to $5,500 each year, for a maximum of $27,500. Graduate students receive $8,000 each year, for a maximum of $60,000. However, the limit for undergraduate and graduate is shared, which means that an undergraduate student who borrowed $27,500 will only have $32,500 available to fund their graduate program.
The second type is known as Stafford loans. They provide more funding that Perkins loans, and students have access to a interest subsidy according to their financial need. Students who receive a subsidized Stafford loan do not pay interest while they attend school. Those who do not qualify must pay interest soon after disbursement. In general, only undergraduate students are eligible for a subsidized Stafford loan. Graduate and postgraduate students are only eligible for the unsubsidized version. In both cases, students will not have to repay the loan balance until they graduate.
Stafford loans award undergraduate students funding according to whether they are financially dependent from their parents, and their year in college. For example, a freshman undergraduate student living with their parents can receive up to $5,500, which matches a Perkins loan. However, if the student is independent, the annual limit is raised to $9,500. A sophomore student will receive $6,500 and $10,500, respectively. Graduate or professional students can borrow up to $20,500 each year. Stafford loans also have borrowing limits. Dependent students can borrow up to $31,000, while independent students are awarded $57,500. Graduate students are given significantly more funding, with a limit of $138,500.
The federal government also offers PLUS loans, which are similar to those offered by private lenders. They require a minimum credit score and students start paying soon after receiving the money. Private student loans and PLUS loans share many features, including higher interest rates than Perkins or Stafford funding, no delayed payments or subsidies. Also, PLUS loans are awarded directly to parents instead, as undergraduate students do not have the required credit score to qualify.
Finally, consolidation loans are also made available to help students streamline monthly payments. They combine multiple student loans into a single one, often with better repayment terms. However, consolidating several federal student loans into a single private loan may have its drawbacks. For example, students may lose access to deferment and subsidized interest payments. They may also be subjected to higher interest rates if their credit score is not robust.
How to apply for a student loan
Students who want to apply for a federal student loan must first complete and submit a Free Application for Federal Student Aid form, also known as FAFSA. This document is used by the government to determine how much assistance a current or prospective student qualifies for. The form must be submitted annually and includes financial information about students and their families.
According to the results of the FAFSA form, colleges and universities will send students a financial aid offer that best suits their financial position. This offer may include access to grants, scholarships or federal student loans. Some institutions award partial funds under certain circumstances.
The specific steps needed to complete the application process vary by institution. Students are advised to contact the financial aid office to receive details regarding the process. However, most students will be required to complete entrance counseling, which teaches students about their loan obligations. They must also sign a Master Promissory Note, in which they agree to the terms of the specific student loan they will be awarded.