Breaking Down the Student Loan Types
The average in-state public college costs $10,116 in tuition and fees. For private colleges, that figure jumps to $36,801.
On top of tuition and fees, students have to pay for textbooks, room and board, and daily living expenses such as food and internet. To help offset these costs, many students have to take out student loans.
There are several student loan types, and the right one for you depends on your current financial situation and how much debt you’re willing and able to take on. Knowing the ins and out of financial aid gives you an idea of what you’ll qualify for and what your student loan payments will look like in the future.
Before taking on any student loan, read this guide. We’ll answer your questions and give you some much-needed information.
What Are Student Loans?
Student loans are a form of financial assistance for students of higher education. This may be for undergraduates, graduates, or students pursuing specialty education programs such as medical school or law school. They help pay for fees and tuition, but they can also be used for paying for school supplies, textbooks, as well as living expenses.
One common characteristic of student loans is that they’re installment loans. That is, they’re paid back in installments after a grace period, which is typically after the student has finished school.
There are student loans that are funded by the federal government while others act somewhat like personal loans and are provided by private institutions such as banks.
Federal vs Private Student Loans
Student loans are obtained through either the federal government or through private institutions. Which one is best for you depends on your financial need, the number of years you’ve been in school and have left of school, and your credit history.
Federal student loans are provided by the federal government. These tend to be more flexible loans that offer low, fixed interest rates.
Beyond the interest rates, these are a good starting point when you require a loan to help you pay for school because they offer interest deferment programs. That means that interest doesn’t accrue while you’re studying. You also won’t have to start paying them back until after you’ve graduated and your grace period has ended.
Private student loans are obtained through banks, credit unions, and also through state programs. They also offer refinance loans once you’re finished school and need to start repaying your loan.
Private student loans require a full underwriting process, which means your credit and ability to repay is checked, among other things. These loans generally carry higher interest rates than federal loans. Their repayment period is also usually shorter.
Other Student Loan Types Explained
There are many types of student loans out there. Below, we’ll explain some of the other student loan types, both in the federal and private varieties.
When the college or university that you attend lends you the money to attend school, that may be a Perkins loan. A Perkins loan is a type of federal loan where funding is drawn from a pool that the federal government funds.
Usually available to any student, Stafford loans don’t consider your credit score or your ability to pay for school. But these low-interest loans are strictly regulated by the federal government.
The federal government also makes money available to parents. These are called PLUS loans and they work similarly to commercial loans.
International students make up 5.5% of the total number of students in US universities and colleges. These students don’t qualify for federal student loans. Instead, they can apply for international student loans through a private lender.
Many states have loan programs. State loans look and feel more like a private loan than a federal loan in that they have higher interest rates and an in-depth underwriting process.
Community banks and credit unions may offer credit union loans. You might be able to get favorable terms for these loans if you already bank at these institutions.
If you have bad credit, consider looking at a student loan for bad credit. Instead of looking at your credit score to decide if you’re eligible, they’ll consider factors such as earning potential.
Many private loans will require you to have a cosigner. If you don’t have someone to cosign for you, then a student loan without a cosigner might be for you. There are only a few lenders who offer this and they’ll consider factors outside of credit history in determining your ability to repay.
For students going to law school, bar exam loans help cover things that other loans don’t. This includes items like exam application fees and prep classes. This way, you don’t have to hold down a job while prepping for the bar exam.
Students attending medical school and who have good credit may qualify for medical school loans. These have lower interest rates than federal loans. However, if you take one, keep in mind that these can’t be forgiven if you work at a nonprofit hospital after graduating.
Additional Student Loan FAQs
How To Get Financial Aid
To apply for federal loans you have to fill out the Free Application for Federal Student Aid (FAFSA). Some of these loans are based on financial need, such as a Perkins loan. That means that even if you need the loan, you could be denied based on the gross income of your family.
Private loans can be obtained from private financial institutions such as banks and credit unions. To qualify for these loans, you typically need to meet strict requirements. That means having a good credit score and enough income to pay back the loan.
In the case that you don’t meet those requirements, there are alternatives. These might include having a co-signer or applying for bad credit loans that we mentioned earlier.
How To Pay Off Student Loans
The most basic way to pay off a student loan is to do just that: use your income to pay them off. But there are other options.
One of these options is an income-driven repayment plan like an IBR, PAYE, or REPAYE. You can use these repayment programs to repay your federal student loans.
Your payment will be based on several factors, including your discretionary income and the size of your family. One of the benefits of paying back loans this way is that your student loan can be forgiven after some time of repayment.
Two other methods of repaying your loans are consolidation and refinancing.
What Is Consolidating Student Loans?
Consolidating your loan means combining all of your student loan types into one single loan. Only some loans qualify for consolidation, including:
- Stafford loans (both subsidized and unsubsidized)
- Perkins loans
- Direct PLUS loans
- FFEL PLUS loans
- Direct loans (both subsidized and unsubsidized)
- Federal Nursing Student loans
- Health Education Assistance Loans
When you consolidate your loans, you’ll only be required to make a single payment every month. Consolidating also allows you to extend the time you have to repay the loan.
You might consider consolidating when you want to make your monthly payments more affordable. Because you can extend the loan to say, 30 years, the monthly amount you have to pay decreases. Remember that that also means you’ll be paying more in interest.
Another reason you might consider this is if you prefer to have one interest rate. Multiple loans mean multiple interest rates. But consolidating means you’ll have one stable and predictable interest rate for the remainder of your repayment period.
Keep in mind that private lenders may charge a fee for consolidation. Also, you could lose any benefits associated with your original loan terms.
What is Student Loan Refinancing?
This is one of the most efficient ways of paying off your loan. It refers to combining your federal loan, private loan, or both into one loan with a lower interest rate. You can also choose new terms regarding fixed or variable interest rates and get new repayment terms anywhere from 5 to 20 years.
However, you likely won’t qualify for refinancing if your credit score is less than 670. You’ll also need to prove that you have a stable and recurring income.
Do Student Loans Affect Your Credit Score?
Just like any other loan, your student loan will affect your credit score.
If you make your payments on time and regularly, your student loan will help you build good credit. But if you make your payments late, that will negatively affect your score.
With that said, you usually have more time to be late on your payment with student loans. For federal loans, servicers typically wait 90 days to report late payments to credit bureaus. For private loans, servicers can report as soon as 30 days.
Can Student Loans be Forgiven?
The Public Service Loan Forgiveness program is a federal program for forgiving student loans. They’ll forgive all of your student loans if you meet certain requirements. One of those requirements is making 120 monthly payments while working full-time in certain sectors.
To find out if you qualify, you can fill out an Employer Certification Form. That form is available through the U.S. Department of Education. Other programs for loan forgiveness are the Teacher Loan Forgiveness program as well as programs available through the state in which you live.
Do Student Loans Count as Income and Are They Taxable?
The IRS taxes everything from salaries and wages to tips, commissions, dividends, and even income from rental properties. These can all be considered taxable income. However, the IRS doesn’t consider a student loan as income if they must be repaid.
Student loans, grants, and scholarships, therefore, don’t have to be reported on your tax return as income, but there is a student loan interest deduction you can get when you file your taxes. Keep in mind, there are some types of financial aid for students still available including employer-provided tuition assistance, student-athlete stipends, and federal work-study program income.
When Should You Apply For a Student Loan?
The FAFSA must be filled out before a specific time when you’re applying for a federal loan. But these deadlines are generally forgiving. You’ll be able to apply well into the school year if you recognize the need for financial aid a little bit late.
Consider, though, that your school will have a deadline for FAFSA, and that will differ from school to school. To find out when your school’s FAFSA deadline is, you should contact the financial aid office of your institution.
When it comes to private loans, you should apply for these only when you’ve maxed out what you qualify for under federal loan programs. After filling out the FAFSA form, your financial aid office will tell you what grants, loans, and work-study funds you qualify for. If that’s not enough to help you pay for tuition, supplies, and living expenses, then consider looking for a private loan to help cover those additional costs.
Additional Financial Advice to Get You Through School
Knowing the student loan types is your first step to getting financial aid to help you pay for school. But there’s a lot more to student financial aid than that. You should know what you qualify for, what the repayment terms are, and whether or not you’ll qualify for reconsideration, refinancing, or loan forgiveness later on down the line.
And as an additional resource, check out our top reads on all things financial advice. This will help you get your finances in order, so you’re in the best position to pay back your loans when the time comes.
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