How to Choose a Student Loan and Avoid Debt Regret – Many people know the truth that going to college in US can be very expensive. There are many people who take students loan to complete their school and college education in US. These people have the burden of student’s loan and they try their best to avert any kinds of extra charges or debt. But most of the time these people do not understand how to avoid the debt and they end up paying more money, than expected. So, through this guide you will come to know about the various methods of payments and interest rates and how you can pay the students loan wisely without getting much interest rate and much more. Continuing reading to know more.
Due to these problems of the student’s loan and difficulty in payment, scholly has been created which takes addresses these kinds of problems of the students. And one of the best parts that you will come to know about scholly is that over the few years many students have won various kinds of scholarships i.e. somewhere around $100 million dollar. There are many students who want their college dream to become a reality for which they take various kinds of loans.
Of late there are 69% of millennials who are at present regretting for having taken the students loan. And if you are among them, then you should go through this guide, & in the end you will know how you have to make a wise decision on taking students loan. In this guide you will come across the following questions –
- What are student loans?
- What is the difference between federal and private student loans?
- What is the maximum amount of student loans you can get?
- How do student loan interest rates work?
- When do you have to pay back student loans?
What are student loans?
Student’s loan can be described as a form of fiscal aid that is given to students or the students avail of such loans to help pay the tuition fee, student’s accommodation, books and study materials, health insurance etc. In addition, the attendance cost. There are many reasons as to why you will least like the students loan. Because these loans are not like scholarship or grants. You will have to pay back the amount that you have taken as loan and that too with interest. Plus, there will be some add on fees and T&C that you will have to fulfill. But the good part is that all students loan are not the same there is a difference in some students loan and some students loan are good.
You should have a good planning before you apply for any student’s loan. And to get a good students loan, you should go through this guide and check all the pros and cons of taking a students loan.
Federal vs. private student loans. What is the difference?
Student’s loans come of two types – one is federal loan and other is private loan. And each loan has its own merits and demerits. Federal loan is a loan that people borrow from the government, whereas a private loan is a loan that people borrow from private lender like bank, private financial organization, credit union, etc. Let us get into the brass tacks of both the types of loan –
Federal Student Loans: The Basic Info
There are many reasons as to why the federal student’s loan is the best type of loan. Since in this type of loan the loan is borrowed from the government, so the government only decides the T&C of the loan. Plus, with this type of loan you get different types of repayment options which are the best ones and in some of them even the loan amount is forgiven and you just have to pay the taxes.
For instance, in a federal loan you get some of the merits like low interest rates, fixed interest rates, and no credit score check. Less worry about repaying the loan until your school/college is finished.
There are 3 types of federal student loans
- Direct Subsidized Stafford Loans
- Direct Unsubsidized Stafford Loans
- Direct PLUS Loans
Federal Student Loan Eligibility
- For direct subsidized Stafford loans, undergraduate students can apply who have demonstrated financial need.
- For direct unsubsidized Stafford loans, undergraduate, graduate, and professional students can apply regardless of their fiscal needs.
- For direct plus loans, graduate and professional students can apply and parents of dependent undergraduate students can also apply for this type of direct plus loans.
For more sources, you can check here.
So, if there are three types of loans why not just take out federal student loans?
You can take a federal students loan, but again there is one thing i.e. the eligibility criteria that some of you may not be able to meet. Plus, it can happen that there are certain limitations regarding the loan amount that you can borrow.
Private Student Loans: The Basic Info
Private student’s loan is a bit confusing type of loan or let us say that it lacks clarity and consistency. Consistency in terms of interest rates. Another thing is that the T&C of the private student’s loans depends mainly on the private lender with whom you are taking the loan. Plus, there are many private lenders who are available.
Apart from that, in this type of loan the interest rates is always a bit higher that you will find. Plus, the private lender also checks the credit score like how much you can borrow depends on the score of your credit and also on your co-signers credit score. And in some of the cases, you may have to pay off the loan while you are or your child is still in school or college. It is not like a federal loan.
Now, you must be thinking whether all the private students loans are bad & you should avoid taking such loans? Well, the answer is NO. Because there are some types of private loans which has great options, especially when you need guidance in completing the repayment of the loan amount.
Lets’ quickly check some of the key differences between federal and private loan
- Repayment –
In a federal loan, you do not have to pay the loan amount unless you have finished your school or college or unless you change your enrollment status. Whereas, this is not the case with the private loans. In a private loan, sometimes you are required to make payments when you are still in school or colleges. And some private loans, will allow you to make delayed payments after school or college.
- Credit –
In a federal loan, credit check is not needed. It is only needed in PLUS loans. Whereas, in a private loan, a credit check is required, a co-signer is needed and co-signer’s credit score is also checked.
- Interest rates –
In a federal loan, interest rates is fixed and low. Whereas in a private loan, the interest rates depends on the credit background and can be more or less compared to the federal loans.
- Loan Forgiveness –
If you are in public service and have taken a federal loan, then a portion of your loan is forgiven after graduation. But you need to come in the eligibility criteria. In a private loan, you don’t have loan forgiveness. But loan through state agencies can be forgiven in some cases.
What is the maximum amount of student loans you can get?
- Federal Student Loans: Borrowing Limits
Though, in a federal students loan you don’t have limit as to how much you can borrow, but there are few things that determines the limit – How much of loan amount one can borrow from federal loan system depends on the details that you input while filing the FAFSA i.e. Free Application for Federal Student Aid . Your school/colleges Financial Aid Department will use the details that you have filled in the FAFSA to find out the loan amount and type and based on the following –
- Your proven financial need
- Whether you’re an undergraduate or graduate student
- What year you are in school
In addition, it also depends on your dependency status i.e. whether you need to include information about your parents on your FAFSA.
For your better understanding, here is the table of federal student’s aid department to get an idea of how much you can borrow with direct subsidized and unsubsidized federal student loans:
|Year||Dependent Students (except students whose parents are unable to obtain PLUS Loans)||Independent Students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)|
|First-Year Undergraduate Annual Loan Limit||$5,500—No more than $3,500 of this amount may be in subsidized loans.||$9,500—No more than $3,500 of this amount may be in subsidized loans.|
|Second-Year Undergraduate Annual Loan Limit||$6,500—No more than $4,500 of this amount may be in subsidized loans.||$10,500—No more than $4,500 of this amount may be in subsidized loans.|
|Third Year and Beyond Undergraduate Annual Loan Limit||$7,500—No more than $5,500 of this amount may be in subsidized loans.||$12,500—No more than $5,500 of this amount may be in subsidized loans.|
|Graduate or Professional Student Annual Loan Limit||Not Applicable (all graduate and professional students are considered independent)||$20,500 (unsubsidized only)|
For more sources, check here.
You must have noticed in the above table that, many details are not given about the PLUS loans. There is a difference between subsidized and unsubsidized loans compared to that of PLUS loans. PLUS loan is available for graduate students those who want to aid their children in paying off the school/college fee. If you are, also one in need and are a graduate or parent plus, then you can take as much amount as you need to cover the cost of attendance. In addition, the other forms of financial aids are minus like the scholarships, grants, work-study etc.
But if you are an undergraduate student and need more money, then you should then you should think about getting a private loan.
- Private Student Loans: Borrowing Limits
Federal loan is very different from private loan and in private loan; each lender will set their own limitations on how much the borrower can borrow. There are few things on which borrowing the amount will depend like how confident the private lender is about your paying capacity, other forms of financial aid that you have received and total cost of attendance for your school or college.
Certain information that the private lenders would like to know about you are as follows –
- Your present credit score
- Your employment history
- The credit score and employment history of a co-signer (e.g. a parent or trusted adult)
- The type of degree you plan to get
- The total cost of attendance
To give you an idea of some private student loan limits, take a look at this table created by NerdWallet:
How do student loan interest rates work?
Whether a private loan or a federal loan the interest rates of the loan is difficult part to digest. Interest rates can make the debt even more tedious one to repay. Therefore, if you have been skimming, now is a good time to slow down your pace because this part is important.
What is an interest rate?
A Interest rate has been defined by Bankrate as –
“the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money”
Federal Student Loans: Interest Rates
For instance, you are a undergraduate whose FAFSA results have come and it identifies that you need fiscal aid to pay for college. For the academic year 2021, you are taking a federal subsidized loan with a principal amount of $3000. There are 3 things that are there in a federal loan. They are as follows –
- Throughout the duration of the loan the interest rate is fixed
- A simple daily interest formula shall be followed i.e. the interest is calculated daily.
- Your interest rate for this year will be 2.75% on federal student’s loan.
Federal Student Loan Interest Rates
For Undergraduate Direct Loans (Subsidized and Unsubsidized) the interest rate is 2.75%. Then, for a Graduate Direct Loans (Unsubsidized) the interest rate will be 4.30% and lastly for a Graduate and Parent PLUS Loans, the interest rate shall be 5.30% .
The ways in which you would calculate the interest rate that too on $3000 subsidized student loan –
- First, divide the interest rate by 365 to get the daily interest rate. (.0275 ÷ 365 = .00007534)
- Next, multiply that daily interest rate by your principal amount. (.00007534 x 3000 = .22602) This means you’ll be charged about $0.226 in interest per day on the loan.
- Then you’ll want to multiply the daily interest amount ($0.226) by the number of days in a month. (0.226 x 30 = 6.78). This means you’ll pay around $6.78 per month in interest.
- Finally, to get the amount of interest accrued per year, simply multiply that monthly amount by 12. ($6.78 x 12 = 81.36) So, you’ll pay about $81.36 per year in interest.
Luckily, that amount per year continues to go down as you pay off the principal balance. Also, since in our example, you got a subsidized federal loan, you don’t need to worry about the interest accruing while you’re in school at least half-time, for 6 months after you graduate, or during a deferment period.
But you will not find the similar cases in other types of federal loans. For instance, while you are still in college or school, interest will accrue on unsubsidized federal loans.
Private Student Loans: Interest Rates
Private student’s loans are more complex because the private lenders will give you an option to choose between variable APR or fixed APR. So, this is completely different from federal students loan.
The interest rate can rise or fall down throughout the term of loan with a variable APR. Whereas, in a fixed APR the interest rate is fixed throughout the term of loan.
Overall, it is much safer to go with a fixed APR. But again there are people who choose variable APR, because in the initial period of the loan the interest rate is much low.
You also need to pay some compound interest with private student’s loans.
According to Investopedia, having a compound interest rate means:
“the daily interest isn’t being multiplied by the principal amount at the beginning of the billing cycle—it’s being multiplied by the outstanding principal plus any unpaid interest that’s accrued”
For you to better understand, let us take an example. For instance, you are a undergraduate student, and you need a private student loan of $17,000 for the coming academic year.
You finally choose to get a private students loan with current interest rate range from 1.49%-10.49% (variable APR) and 3.49%-14.39% (fixed APR). You decide to go with a fixed APR, and the lender offers you a daily compound interest rate of 8.5%. Let us check on calculating compound interest –
Find the daily interest rate by dividing your APR (8.5%) by 365. (.085 ÷ 365 = .00023288)
Next, we multiply your daily interest rate by your principal balance. (.00023288 x 17,000 = 3.958). So, your daily interest is $3.958.
Here’s where it differs from fixed interest. The next day, you’re not multiplying your daily interest rate by your principal balance anymore. You’re multiplying it by the new sum of your principal and yesterday’s daily interest (17,000 + 3.958 = 17,003.958).
And then day by day, year by year, it continues to grow exponentially.
Day 2: (.00023288 x 17,003.958 = 3.959) → new loan balance: $17,003.958 + $3.959 = $17,007.917
Day 3: (.00023288 x 17,007.917 = 3.96) → new loan balance: $17,007.917 + $3.96 = $17,011.87
Day 4: (.00023288 x 17,011.87 = 3.961) → new loan balance: $17,011.87 + $3.961 = $17,015.831
Now just imagine the new balance on day 365 or day 1825 (5 years)!
This all might look very complex and scary but it is suggested that you do your research well, so that you can get better rates and also terms than what is used in this illustrations.
When do you have to pay back student loans?
Many people don t like to converse about paying back the students loan. Most of them will avert this topic. But you should continue reading to broaden your horizons and understand the concept better-
Federal Loans: Paying Them Back
You can expect in about 6 months to see your federal student’s loans after you graduate, leave school, or drop below half-time enrollment. There are total 8 different types of repayment plan on which your payment depends. They are as follows –
- Standard Repayment Plan
- Graduated Repayment Plan
- Extended Repayment Plan
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
- Income-Sensitive Repayment Plan
These all the repayment plans have their own eligibility criteria and in brief it depends on the type of federal loan you choose and your repayment plan, in which you will be paying anywhere from 10% of your discretionary income per month to high monthly payments that make sure you pay off the loan within ten years.
In order to pay off your loan faster, you can make payments while you are still in college or school and also you can pay more than minimum amount of your repayment plan amount, so that your loan gets paid quickly.
Private Student Loans: Paying Them Back
Paying off a private loan is not that easy compared to a federal students loan. This is because when you start paying back the loan, the options for repayment are determined by the private lender.
Some borrowers will have to make immediate payments, while others may have 6-month deferment plan as they would have a federal student’s loan. Whereas, some others may have to make a regular monthly payment while they are still in school.
It can be time consuming and costly, if you don’t understand which type of loan you are taking and why? Therefore, you should always compare and check the best student’s loan before you sign any kind of agreement of loan.
Final thoughts –
One of the biggest decisions that you will ever take is to take a students loan. The only thing that is required is proper planning and understanding how the loan system works with different people – i.e. the federal and the private loans. You do not have to get scared or regret later. You should be able to make a more informed choices and should study and research about the various types of loans available so that you can choose the best ones. Apart from that, this guide has already mentioned about the loans and how it can work, you can also go through similar posts relating to repayment methods that will help you to know better which students loan to choose.