Student loans are a fact of life for most college students. In addition to paying tuition, you may also need to take out student loans in order to cover other costs such as books and supplies.
There are eight different types of student loan to choose from, but not all of them are created equal. Some lenders charge higher interest rates than others, and some offer better repayment options than others. Here’s how to determine which type of student loan is right for you.
Federal Direct Loan
The federal direct loan program offers an option that allows borrowers who wish to enroll in certain public colleges or universities to apply for aid directly through their schools. This means that the school will be responsible for picking up most of the tab, so you won’t have any out-of-pocket expenses when it comes time to pay back your loans.
This type of loan has no fixed interest rate; instead, it is based on the prime rate plus 3%. So, if the prime rate at the time you sign up for your student loan is 5%, then your interest rate would be 7%. After six months, your interest rate will drop down to 6% if you haven’t paid anything yet, and 4% after 12 months. If you don’t make payments, your interest rate will go up again.
One of the main advantages of this type of loan is that there are fewer restrictions involved. Federal loans can be used for both undergraduate and graduate programs, and they can be used for both public and private institutions. However, borrowers must be enrolled full-time (at least 12 credits per semester) and maintain satisfactory academic progress while taking out a federal loan.
Non-Direct Stafford Loan
If you want to borrow money from a bank or credit union, this is probably your best bet. The advantage here is that you get to pick your interest rate, which can range anywhere from 0%-6%, depending on what kind of bank you work with. Another benefit of working with a non-direct lender is that you don’t have to fill out tons of paperwork to get approved for a loan. Instead, you just have to answer a few questions and provide your FAFSA financial information.
However, one disadvantage of using a non-direct lender is that you have to put down a security deposit. This is required because the bank assumes that you will default on your loan if you miss a payment. Once your loan is funded, you will receive a check every month until you repay the principal amount and interest. Then, you will only see the remaining balance once every year. If you do end up missing a payment, you could potentially lose the entire principal and interest amount.
Federal Parent Loan
Parents often use federal parent loans to finance their children’s education. These loans require the same qualifications as direct federal student loans, but the application process has been streamlined. Borrowers usually need to submit either a completed FAFSA or a CSS Profile, a special form that provides more detailed financial information about themselves. Parents can also contact lenders directly, rather than applying through their child’s school.
Unlike direct federal loans, parents can qualify for parental loans regardless of their income level. They can even borrow money for postgraduate degrees or professional training. And since these loans are designed as grants, they aren’t taxed like regular student loans. On top of that, parents don’t have to pay any interest unless the borrower defaults on his/her loan. In this case, the government will collect the interest and send it to the borrower’s parent(s).
Another key advantage of using a parental loan over a direct federal loan is that parents can withdraw funds to help pay for tuition and living expenses. This way, their child doesn’t have to worry about making monthly payments, and they won’t have to spend time worrying about whether their child will ever get a degree.
Guaranteed Student Loan
A guaranteed student loan requires that the borrower enter into a contract with a private lender that guarantees a specific interest rate in exchange for a lump sum payment upfront. The lender pays the interest on this loan, meaning that the borrower never has to pay anything towards the principal. But since the borrower still needs to pay off the principal before he/she gets access to the cash, the interest rate is much higher than with a standard student loan. As long as the borrower maintains satisfactory academic progress, his/her interest rate won’t change.
Stafford loans are a form of federal student loan funding available to both military veterans and active duty service members, as well as their spouses and dependents. Unlike other types of student loans, Stafford loans don’t come with a fixed interest rate. Instead, borrowers can choose between two types of terms: fixed or variable. Fixed Stafford loans are issued with a 10-year repayment period, while variable loans have a repayment term of seven years. Like direct federal loans, Stafford loans are subject to taxes, and the government collects a portion of interest earned each year.
For qualified borrowers, both fixed and variable Stafford loans can be offered at lower interest rates than direct federal loans. But because they aren’t guaranteed by the government, they are less forgiving, which means that you’ll likely pay a higher interest rate if you miss a payment.
Graduate Plus Loan
Graduate Plus loans are meant for students who already have a bachelor’s degree, but want to complete their master’s or doctoral studies. Unlike federal student loans, these loans are completely tax exempt, which means that they don’t attract any additional interest if you don’t make payments. The downside here is that you have to agree to a five-year repayment schedule. If you decide not to finish your program within five years, you will have to start repaying your loan immediately, even though you haven’t started earning a salary yet.
Parent PLUS Loan
This type of loan is intended for borrowers whose parents are helping to finance their education. It is similar to a Guaranteed Student Loan, except that the parent loan doesn’t come with a fixed interest rate. Instead, they can choose from three types of repayment schedules: extended, graduated, or standard. Extended plans allow borrowers to defer paying back their loan for up to 15 years, but they will eventually have to begin paying interest. Graduated plans give borrowers the ability to reduce their monthly payments, but they must pay back all of the money they borrowed within 20 years. Standard plans are the simplest, and borrowers can repay their loans in 25 years without ever having to pay any interest.
Some states and municipalities offer their own student loan programs. But many people opt instead for private loans, which provide more flexibility than state loans. With a private loan, borrowers can choose from a wide range of lenders that offer competitive interest rates, flexible repayment plans, and personalized customer service. Private loans require borrowers to submit a FAFSA or CSS Profile, and they usually require a security deposit as well. Because they’re not federally backed, private loans are considered taxable, and the government collects a portion of interest earned each year.
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