How Do Student Loans Work

Higher education comes at a steep price. While anyone would love to obtain their desired college degree, not everyone can manage it. Fortunately, you can apply for a student loan and give your academic endeavor a kick start. A student loan is money borrowed from the government or a private lender to pay for college tuition in return for repayment in installments over the years. Although it does not differ a lot from other types of loans, there are a few attributes that fall under repaying student loans. 

How Do Student Loans Work?

Just like any other loan, student loans have an added interest when it comes to repayment.  It’s not just the amount you borrow, but the total amount that is accumulated with the addition of the monthly interest. To understand how student loans work, two terms need to be considered; Interest Rate and Origination Fees.

The interest rate on your student loan may be fixed or variable. Federal student loans usually have fixed interest rates. On the other hand, private student loans that are acquired from private lenders, banks, credit unions, or similar financial institutions may have fixed or variable interest rates.

You should also be aware of origination fees which are paid initially when you borrow the money for a student loan. In the case of federal student loans, the percentage of origination fees may range from 1.068% to 4.276% on the amount borrowed. Although the majority of private student loans do not have origination fee it depends on the financial institution.

If you want to get a clear explanation with visual work, you can check out this articulate video by College Ave Student Loans.  

What Are The Types of Student Loans?

Federal Loans

Federal student loans are available through the US government. It’s better to try for these loans than privates ones as they are less expensive and provide more benefits. They allow you to borrow money without a cosigner, have fixed and lower interest rates, and provide flexible repayment plans. There are four types of federal loans available to students.

Direct Subsidized Loans: These are available to undergrad students who can show financial need. This can be a great cost-saving option as you do not have to pay the interest when you’re enrolled in college at least half-time as well as during the 6 months after your graduation.

Direct Unsubsidized Loans: These are available to both undergraduate and graduate students even if a financial need is not demonstrated. However, unlike subsidized loans, the interest needs to be paid while you’re in college otherwise it will be added to the loan balance. 

Direct PLUS Loans: Also known as Grad PLUS and Parent PLUS loans, these are available to graduate students and parents of undergrad students to cover financial costs. You can apply for this if you need additional money that is not covered by subsidized or unsubsidized loans. A credit check is necessary if you want a PLUS loan. 

Direct Consolidation Loans: This allows you to combine multiple loans to claim the benefits from all of them. Although it can extend your repayment period, and reduce the monthly payment, it would lead to an increase in interest over time. 

Private Loans 

Private loans are usually available through banks, credit unions, financial institutions, or a state loan agency. With the need for a cosigner, private loans are more expensive than federal loans since they have higher interest rates. Also, they may have fixed or variable interest rates depending on the private lender who decides on the requirements to apply for the loan. Plus, interest will be accrued the moment you take out the money. 

What Are The Repayment Options?

Repaying Federal Loans 

Standard Repayment: The repayment plan will be set by the government or the private lender. There will be a fixed monthly payment which will continue for 10 years. 

Extended Repayment: Ideal for students who have an outstanding loan of more than $30,000, the extended repayment plan goes beyond the 10 years, lasting up to 25 years.  

Income-Based Repayment: These payments are made based on 10%-15% of your discretionary income, which will last up to 20 to 25 years. Any amount which is left to be paid after that period will be forgiven.

Income-Contingent Repayment: These payments are made based on 20 % of your discretionary income for 12 years or less. 

Income-Sensitive Repayment: These payments need to be done based on your total income, not discretionary income, and should be paid off within 10 years. 

Pay As You Earn: These monthly payments are set at 10% of your discretionary income and will be the same as a standard repayment plan. Plus, any balance after 20 years will be forgiven.

Repaying Private Loans 

Repaying private loans depend on the terms and conditions set by the private lender. A monthly amount has to be paid which is a combination of the principal payment and the set interest. You may negotiate the repayment plan with the lender but not every lender will be flexible. Some may even require you to repay while you’re in college.

How Much Money Should You Borrow?

Even if you have the option to borrow the maximum amount, you should only stick to borrowing the amount for a student loan that you absolutely need. You should calculate an estimated amount for your living expense in addition to the monthly bill for the tuition fees. Also, keep in mind that you’ll have to start repaying as soon as you graduate therefore, try not to borrow more than the possible salary in the first year.

Conclusion 

Student loans are a great option for someone who doesn’t have the money to pay for college. Let’s get this straight; college is very expensive! So you can go for this route as long as you know how student loans work, its types, and how the repayment works. With that being said, we are positive that this article will help you understand all you need to know about student loans. 

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