Taking out student loans is an option for students and families who do not have the resources to pay for a college, university or technical career education.
Borrowing money may allow you to pay for college tuition and other costs. However, it is important to consider that you will have to pay back this borrowed money with interest after you leave school.
For this reason, it is important to evaluate which student loans are the most appropriate for your current economic condition as well as the financial situation you hope to have when you graduate.
Types of Student Loans: Federal Versus Private
There are two main ways to obtain a loan to finance your studies: federal student loans and private student loans. The federal student loans are funded by the U.S. Government. On the other hand, private student loans are provided by private lenders, including banks, online lenders and credit unions, among other entities.
Before selecting a loan, it is important to consider student loan interest rates. When it comes to interest rates, there are important differences between a federal and a private loan.
With a federal student loan, the federal government usually pays the interest and subsidizes your student loan while you are in school. Furthermore, the interest rates on this type of loan are set at a single rate, with no possibility of variations over time. This means that if you purchase a federal student loan, your interest rate will not grow over time. Additionally, federal student loans offer income-driven repayment plans that make your repayments more convenient.
By contrast, a private student loan may offer a variable interest rate, which may go up over time. This means that you may end up paying more each month than you expected to when you accepted the loan.
What is the most convenient student loan option?
If you need to borrow money to pay for college, the most convenient option is most likely a federal loan. Overall, they tend to be easier to pay back, and your payment requirements will be more appropriate for your financial situation after graduation.
Federal loans make it possible for you to enroll in a payment plan that meets your income level. This means that you will never have to pay more money than you earn to cover your student loan debt. What you pay monthly will represent only a certain percentage of your income. Federal loans based on your monthly income limit the amount of money you have to pay per month.
By contrast, private loans do not offer these convenient features. A private lender can increase your interest over time. Furthermore, the amount of money you have to pay per month could end up being a large percentage of what you earn, since it will not take into account your salary and ability to pay.
In addition, federal student loans allow you some options for loan forgiveness. This option does not exist with private loans, and therefore your debt cannot be forgiven. Here are some situations when your federal student loans will be forgiven:
- The Public Service Loan Forgiveness program forgives part of your student loans if you work for a government or non-profit organization.
- Certain teachers may be eligible for Teacher Loan Forgiveness.
- If your school closes, you may be eligible for loan forgiveness.
- Your loans may be forgiven if you become disabled.
These are not the only opportunities for federal loan forgiveness. In addition, federal loans may offer you periods of deferment and forbearance when you do not have to pay your student loans. As you can see, federal student loans have more protections in place for the borrower.
What if your federal loan does not fully cover college expenses?
If you are interested in applying for a federal loan, you must complete the Free Application for Federal Student Aid (FAFSA). After completing the FAFSA, you will find out if you qualify for any federal student loans, grants, scholarships, work-study or other types of financial aid. You may choose to accept or turn down any of these forms of aid.
It is best to choose scholarships, grants and work study opportunities, as these forms of financial aid do not have to be paid back. If these are not enough to cover your college expenses, you can take out safe federal loans. When these loans are not enough to fully pay for your career education, you should evaluate some possibilities that will help you reduce costs, so you can avoid taking out a private loan.
You can cut costs by living with friends or family, renting a place with multiple people, buying used materials, getting help from a family member or getting a part-time job. There are also PLUS Loans for parents. They are federal loans that families can use to help pay for their children’s college or undergraduate studies. They are also known as Direct Loan Program Parent PLUS loans. These are all small strategies to help you get through your career without incurring new debt.
Remember that the terms of a private loan generally do not offer any type of flexibility when it comes to paying, do not take into account your income level and may increase your interest rate over time. This will make you have to have more monthly money to pay the same debt. For these reasons, a private loan can become an increasing debt that can put you in a worse place financially. So, the best option is to exhaust all the possibilities to receive federal student loans, and as a last option, consider the alternative of acquiring a private loan.
Before applying for a private or federal loan, calculate what you expect to pay monthly, including the interest, when you begin making repayments. Also, make an evaluation of the salary you expect to receive after completing your college career. Make sure that your income level as a professional is higher than the interest and the monthly amount you must pay.