Student loans can be a necessary evil when financing your education. But before you take out a loan, this is all you need before getting a student loan.
This blog post will explore all you need to do before getting a student loan.
We’ll cover topics like how to apply for a loan, what kinds of loans are available, and the pros and cons of student loans.
By the end of this post, you’ll be armed with the knowledge you need to make smart decisions about your student loans.
Types of Student Loans
There are two main types of student loans: federal and private. Federal student loans are issued by the government and typically have lower interest rates than private student loans.
Private student loans are issued by banks, credit unions, and other financial institutions.
1. Federal Student Loans
Federal student loans offer a variety of benefits that private student loans don’t. These types of loans come with flexible repayment options, such as income-driven repayment plans.
They also have generous loan forgiveness programs for those who use them for public service careers or other special circumstances. There are four main types of federal student loans:
Direct Subsidized Loans
These loans are available to undergraduate students with financial needs.
The government pays the interest on these loans while the borrower is in school, during their grace period, and during deferment periods.
Direct Unsubsidized Loans
These loans are available to undergraduate and graduate students, but not all students will qualify.
Interest accrues on these loans from when they’re disbursed until they’re paid in full.
Borrowers can pay the interest while in school or let it accrue and be added to the loan’s principal balance.
Direct PLUS Loans
These loans are available to graduate or professional degree students and parents of dependent undergraduate students.
Interest accrues on these loans from when they’re disbursed until they’re paid in full. Borrowers can pay the interest while in school or let it accrue and be added to the loan’s principal balance.
PLUS, Loan applicants must not have an adverse credit history (a history of 90 days or more of delinquent debt or bankruptcy).
Direct Consolidation Loans
Direct consolidation loans allow you to combine student loans into one. The main benefit of this type of consolidation is that it allows you to extend the repayment term of your loans, which can lower your monthly payment.
However, when you consolidate, the interest rate on your new loan could be higher or lower than the rate on your existing loans.
2. Private Student Loans
Private student loans are available to students who need more money than federal loans can provide.
They often have higher interest rates and fees than federal loans but may be easier to get.
Private student loans are available from banks, credit unions, and online lenders.
Unlike federal student loans, private student loans aren’t backed by the government, so they come with fewer protections if you default on payments.
Private student loan borrowers can expect various repayment options, including income-based repayment plans that can lower monthly payments.
Some lenders will offer a deferment option for those who qualify until their graduate school or medical school program is completed.
Private student loan rates vary based on your credit score; the higher your score, the lower your rate will be.
The Application Process
The application process for student loans can vary depending on the loan you are applying for.
Federal student loans have a standard application process that all borrowers must follow.
Private student loans may have a different application process, so it’s important to check with your lender to see what is required.
The first step in applying for any type of student loan is to complete the Free Application for Federal Student Aid (FAFSA®).
This form must be submitted annually for federal student aid, including grants, work-study, and loans. You can submit the FAFSA online at fafsa.gov.
Once you have submitted the FAFSA, you will receive a Student Aid Report (SAR) that outlines your expected family contribution (EFC).
This is the amount your family is expected to contribute to your education costs. Your EFC will determine your eligibility for federal and state financial aid programs.
If you are eligible for a federal student loan, you will receive a Master Promissory Note (MPN) from your lender.
The MPN is a legal document that states the terms and conditions of your loan. You must sign and return the MPN before your loan can be disbursed.
If you are taking out a private student loan, you must complete a private loan application and promissory note with your chosen lender. The promissory note
Interest Rates and Repayment Plans
There are two main types of student loans: federal and private. Federal student loans are provided by the government and have fixed interest rates.
Private student loans are provided by banks, credit unions, and other financial institutions and have variable interest rates.
The interest rate on your loan will affect how much you have to pay back each month.
A higher interest rate will result in a higher monthly payment, while a lower interest rate will result in a lower monthly payment.
When choosing a student loan, you should consider the interest rate and the repayment plan.
Federal student loans have four main repayment plans: Standard, Extended, Graduated, and Income-Based Repayment (IBR).
The Standard Repayment Plan has a fixed monthly payment for 10 years. The Extended Repayment Plan has a fixed monthly payment for 25 years.
The Graduated Repayment Plan has payments that start low and increase every two years for 10 years.
The Income-Based Repayment Plan is based on your income and family size, and your payments will change as your income changes.
You can choose any of these repayment plans when you first take out your loan or switch to a different plan later if you need to.
You can also choose to defer or forbear your loan payments if you can’t make your payments for a temporary period of time.
With deferment, you don’t have to make any payments (or only make interest payments) for a
Forbearance and Deferment
If you struggle to repay your student loans, you may be considering forbearance or deferment as a way to temporarily postpone or reduce your payments.
Both options can provide relief in the short term, but it’s important to understand the pros and cons of each before making a decision.
Forbearance allows you to temporarily stop making payments on your loan or make smaller payments than you normally would.
This can be helpful if you’re experiencing financial hardship or cannot find a job after graduation.
However, interest will continue to accrue on your loan during the forbearance period, which means you’ll owe more money in the long run.
Deferment is similar to forbearance in that it allows you to postpone making payments on your loan.
However, with deferment, no interest accrues on your loan while you’re not making payments. This can be a good option if you’re returning to school or unemployed.
Remember that not all loans are eligible for deferment, and there may be other requirements to meet before you can qualify.
Both forbearance and deferment have advantages and disadvantages, so it’s important to weigh your options before deciding which is best for you.
If you’re having trouble making your student loan payments, contact your lender or servicer to discuss your options and find out what’s right for you.
Loan Consolidation and Discharge
If you’re considering consolidating your student loans or applying for loan discharge, you should know a few things first.
Loan consolidation can lower your monthly payments by extending your loan term, but it will also increase the total amount of interest you pay over the life of the loan.
On the other hand, loan discharge can get rid of your student loan debt entirely, but it’s not always easy to qualify.
You’ll need to work with a student loan consolidation company to consolidate your loans. They’ll help you compare rates and terms from different lenders to find the best deal.
When consolidating, you may also be able to choose a new repayment plan that better fits your budget.
You’ll need to submit a request to your lender or servicer to apply for loan discharge. If approved, your debt will be forgiven, and you’ll no longer be responsible for repaying your loans.
However, there are only certain situations where you can qualify for discharge, such as if you become permanently disabled or your school closes before you finish your degree.
Consolidating or discharging may be a good option if you struggle to make monthly student loan payments.
Just make sure to do your research first to understand the potential consequences before making a decision.
The Pros and Cons of Student Loans
There are a lot of factors to consider before taking out a student loan. On the one hand, loans can help you pay for school and avoid debt.
On the other hand, loans can be difficult to repay and may cost you more in the long run.
Let’s start with the pros of student loans. First, loans can help you cover the cost of your education.
If you don’t have enough money saved up to pay for school, loans can bridge the gap. Second, loans can help you avoid going into credit card debt.
Using credit cards to pay for school can be risky because spending more than you can afford is easy.
Third, loans give you time to repay your debt. Unlike credit cards, which typically have high-interest rates and require immediate repayment, student loans usually have lower interest rates and allow you to spread out your payments over a period of time.
Now let’s look at the cons of student loans. First, loans can be difficult to repay. You may have trouble making your monthly payments if you take out too much money or don’t get a job after graduation.
Second, loans may cost you more in the long run. Even though student loan interest rates are usually lower than credit card rates, if you take out a loan and don’t make your payments on time, you may pay more in interest and fees over time.
So, are student loans a good idea for you? That’s totally dependent on your situation. If you’re still in school, think about it carefully first.
If you’re already out of school, you might want to look at your current financial situation and future plans.