With trillions of dollars of student debt in the United States, it’s no wonder why people are terrified to even broach the subject of student loans.
What’s So Scary About Student Loans?
That’s just the thing—the scary part lies somewhat in a lack of knowledge about how loans work. First of all, loans are offered on both a federal level and from private loan companies. These different loan providers offer different types of loans, most of which have different interest rates. For some types of loans, the borrower doesn’t even have to worry about the interest rate because the government takes care of it. Those kinds of loans fall under the category of federal student loans. That’s an umbrella term for loans that the federal government offers, the most common ones being Direct Subsidized Loans, Direct Unsubsidized Loans, Perkins Loans, and Direct PLUS Loans. Both Direct Subsidized Loans and Direct Unsubsidized Loans have a 4.66% interest rate for undergraduate students, though the Direct Unsubsidized Loan has a slightly higher interest rate for graduate students. These loans are obviously very similar. The main difference is that for Direct Unsubsidized Loans, the borrower is expected to pay the interest according to their agreement with the Department of Education. For Direct Subsidized Loans, however, the borrower isn’t always charged interest. When they’re in school, the federal government covers any interest that accumulates.
In the case of the Perkins Loan, the college is the one that’s lending the money. It is also a needs-based loan that requires you to communicate with your college or whatever company your college is working through to provide you with the loan. This type of loan includes a 5% fixed interest rate. That last type, the Direct PLUS Loan, is meant for the parents of dependents who are either undergraduate or graduate students. Its interest rate hovers around 7%, and a credit check is required for parents to qualify for it. That being said, if this loan is consistently being paid on time, it will be a boost for credit. This loan is meant for any gaps between income and loans that students qualify for on their own. For the average middle-class family with a relatively high income, there is still a gap that options like the Direct PLUS Loan can bridge. All of these options require a student to complete a Free Application for Federal Student Aid.
Keeping Options Open
Again, those four types of loans may be the most common student loans, but they are most certainly not the only types of loans out there. Private lenders like banks and credit unions are happy to offer loans as well, though there are pros and cons when compared side by side with federal student loans. For one, private loans usually offer a choice between variable interest and fixed interest. These types of loans do not require a student to have filed a FAFSA, but they do have some downsides. Like the Direct PLUS Loan, an applicant’s credit history is taken into account when they apply for the loan. They also only offer borrowing in amounts up to the cost of attendance, and there are no changes in repayment plans allowed after borrowing. Overall, federal student loans typically offer lower interest rates and a wider variety of repayment plans.
Within this subject, it’s also important to take into account private student loans versus personal loans. Private student loans are pretty much exactly what they sound like. They can be used for any educational expenses, whether it’s tuition, textbooks, or monthly rent.
Interest rates are variable based on your credit history, but in general terms, private student loans have lower interest rates than personal loans. Personal loans aren’t limited to educational expenses but are used in the broader sense of big purchases in life, like a house. They also usually require the borrower to start paying the loan off in a shorter time frame than private student loans. Thus, a personal loan is definitely an option for student debt, but it isn’t as flexible with repayment options as other loans that should be higher priority
Now, for the most stressful part: repayment. Federal loan programs actually offer a fairly wide variety of repayment options, including a Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plan, Revised Pay As You Earn Repayment Plan, Pay As You Earn Repayment Plan, Income-Contingent Repayment Plan, Income-Sensitive Repayment Plan, and Income-Based Repayment Plan. While some of these might sound the same, they each have their own caveats with time frames of repayment and how much you’d be expected to pay in each installment.
With all that in mind, it’s important to have someone in your corner to advocate on your behalf. Fortunately, there are companies like Juno who do just that. With Juno, you’ll have someone who speaks the language of loan lenders. Once you sign on, they can negotiate with lenders and bring down the rates to something far more affordable and less intimidating. After all, any student borrower knows how tight money can get. Bringing down those rates even a little bit can save thousands of dollars in the long run, an opportunity any student should jump on if they get the chance. At the end of the day, college is an investment. If loans are the best way to make that investment, it’s only fair that those loans are negotiated with your best interest in mind.
Categories: college admissions, student loans