A student loan is a type of borrowing that can help you pay for college costs like tuition, fees, books and supplies. It also helps you build your credit score and reduces your financial anxieties.
You can get a student loan from the federal government, a bank or other private lender. Understanding how student loans work can help you make an informed decision about which one is right for you.
Types
A student loan is money that you borrow to help pay for your education. They can be federal or private loans and come with different repayment terms and perks. It is important to know the difference between these types of loans so that you can choose the right one for your situation.
Federal loans, which are made by the government, have more benefits than loans from banks or other organizations. These include low interest rates, flexible repayment options and no credit check.
If you’re a first-year undergraduate, you can receive up to $5,500 in federal subsidized loans, and $3,500 for your dependents. These loans are based on your financial need and you don’t have to pay any interest while in school or during any deferment periods.
Direct subsidized loans are designed for students who have demonstrated financial need, as determined by the FAFSA. The government pays the interest on these loans while you’re in school at least half-time, during any period of deferment and during your six-month grace period after graduation.
Unsubsidized loans are for students who have not demonstrated need, and they do accrue interest while you’re in school or during any deferment period. There is a cap on the amount of these loans, but you can still borrow more than the maximum if your financial need isn’t as great.
There are also Direct Consolidation Loans, which enable you to combine all of your existing loans into a single loan for a lower fixed interest rate. They’re a good option for students who are having trouble keeping track of multiple loans with multiple servicers.
Another type of federal loan is the Direct PLUS, which is available to graduate and professional students, or to the parents of dependent undergraduates. These loans are available to those with good credit, but you may need a co-signer.
Both federal and private loans have their advantages, so it is best to shop around for the best deal. In addition, it is often a good idea to consider all of your other free scholarship and grant options before deciding on a loan.
Interest rates
The interest rates associated with student loan loans can make the difference between paying off debt in a few years and taking decades to pay it off. That’s why it’s important to understand how interest rates work and what you can do to save money on your student loan.
Federal loans typically have fixed interest rates, so your monthly payment stays the same. However, some private student loans have variable interest rates, which can fluctuate based on market conditions.
A good credit score is the best way to qualify for a student loan with a low interest rate. Lenders use a FICO scoring model to assign loan rates based on your credit history and score. A high score equates to a lower rate and is a good sign that you’ll make consistent, on-time payments throughout the life of your loan.
You should also look into refinancing your existing student loans, which can offer a lower interest rate. This can save you hundreds or even thousands of dollars in interest over the life of your loan, depending on how long it takes you to pay off your loans and what type of rates are available.
Besides saving you money, refinancing can help you avoid costly fees and penalties. Many refinance lenders offer free consultations, so you can compare different options and find the right one for your financial needs.
For example, you may have a parent or graduate student who wants to take out a private loan to cover the cost of their education. This can help you save on interest rates because the loan provider doesn’t have to cover the costs of the federal government’s loans.
Another option is to take advantage of the Public Service Loan Forgiveness program, which allows you to cancel your student loan debt after you’ve made 10 years of on-time payments. This could save you more than $15,000 over the life of your debt.
Finally, the best way to lower your overall debt load is to build an emergency fund and contribute to a 401(k) or IRA. Having these savings can give you the extra cushion you need to survive a job loss, a medical emergency or other unexpected expenses.
Repayment periods
Student loan borrowers can take advantage of a variety of repayment periods, depending on their situation. For example, income-driven plans may reduce monthly payments based on your income and family size, while extended repayment plans allow you to stretch out the repayment period for up to 25 years.
The repayment plan that you choose will depend on several factors, including the amount you owe, the type of student loan and your interest rate. Your loan servicer will help you find the best option for your specific situation.
A standard repayment plan is the default option for federal student loans, and it pays off your loan in about 10 years. If you’d like to see how much you would pay under different options, the Education Department’s Loan Simulator can help you compare your costs.
Graduated repayment is another popular option, which starts with lower payments and gradually increases over time. It’s available for a range of loans, from small to large.
Borrowers can also use forbearance to temporarily postpone or suspend their repayment plan. This option can be helpful for people who have been laid off or experience other financial problems.
During the forbearance period, your loan servicer will work with you to negotiate a new repayment plan. It will also report your account to the credit bureaus if you miss a payment.
You can also opt to defer your student loan payment while you work or pursue a career opportunity. This is a good option for recent graduates who are still looking for a job.
Unemployment deferment, which is available for federal student loans, lets you delay your payments while you’re unemployed. You’ll need to reapply every six months, showing proof of unemployment benefits and an active job search.
For private student loans, you can get a grace period that extends to nine months. You can also request a six-month extension by calling the lender and letting them know you need additional time to repay your debt.
If you’re having trouble making payments, talk to your lender or a financial counselor. They can help you figure out your options and make sure you’re taking advantage of any opportunities that may be available to you.
Credit checks
When you apply for a student loan, lenders may check your credit score. That information helps them determine whether you’re a good credit risk and what type of interest rates and repayment terms would be best for you.
Credit scores are calculated using a number of factors, including payment history, debt-to-income ratios, and average account age. If you make all your payments on time, it can improve your credit score.
However, missing or late payments can also damage your credit. Depending on the loan type, this can be either a permanent blemish or just a short-term drop in your score.
For federal student loans, the servicer of your loan waits at least 90 days to report late payments to a credit agency. For private student loans, lenders typically report a missed or late payment to one or more credit agencies after 30 days.
It’s important to pay your student loans on time, every time. Missed or late payments can damage your credit and can also result in higher interest rates and fees.
Having a long credit history will help you build a solid reputation in the eyes of lenders. You’ll be seen as a lower risk than someone with a shorter history, and it can give you a boost in your FICO score.
According to John Rossman, a finance professor at the University of Colorado, an average credit age of five years or more will account for 15 percent of your score. A longer credit history also will lengthen your debt to income ratio, and it can help you pay down more of your student loans.
When you take out a student loan, it will be reported to the credit bureaus and added to your report as a trade line. Each trade line contains detailed information about the loan, such as the account name and number, the date opened, the original balance, the current balance, the payment status, and the monthly payments.
When your student loan account is paid and closed, it will drop from the credit report. But this will usually be a temporary drop. And if you continue to pay your student loans on time, they should re-establish themselves on your credit report as a positive factor.