Going to college is one of the most significant decisions an individual will ever make. There are enormous opportunities that come with higher education, but there are also significant costs associated with pursuing a degree. Most college students, if not all, need financial assistance to pay for tuition, books, and other fees. This is where student loans come in handy.
Student loans are a type of financial aid that supports students across the globe in achieving their dreams of obtaining a college degree. While student loans can be a great resource, they can also become a burden if you don’t understand how they work. In this blog post, we will share three things you need to know about your student loan to make informed decisions and avoid unnecessary debt.
There are different types of loans
The first thing you need to know about student loans is that there are several different types. The majority of options fall into one of two categories: federal loans and private loans. Depending on your finances and personal circumstances, one type may be more suitable than the other. Generally, federal loans are designed to support a wider range of people, since they come with longer deferment periods and the repayment options are more flexible and affordable.
On the other hand, private loans typically have higher loan limits (which could be viewed as a good or bad thing) and have variable interest rates. Private loans are typically taken by students who aren’t eligible for government support – perhaps due to citizenship status – or by anyone who needs to borrow a larger amount than the federal loan offers. Make sure to carefully research the options available before deciding which type is right for you.
What are the interest rates?
Interest rates determine how much you will pay for your student loans over time. Federal student loans offer fixed interest rates, which remain the same throughout the loan period. The current interest rate on federal undergraduate loans for the 2023-24 school year is 5.5%.
The interest rate applied to private loans works slightly differently. The rate of interest on individual loans is set by private lenders and will primarily be determined by your credit score – you could pay anywhere between 4% and approximately 15% in interest on a private loan. To get approved for the lowest rate of interest, you’ll need to have built up an excellent credit rating, which can be difficult as a young person.
How will you pay it off?
Another vital thing to know about your student loan is your payment options. Federal student loans offer various repayment plans, including standard, extended, graduated, and income-driven plans. There are pros and cons to each type, and your choice of plan will impact your finances for years to come, so it’s important to take your time in making the right decision.
Private loans also generally offer different repayment options, such as in-school deferment and forbearance. While the government is obligated to offer students flexible and affordable repayment options, this doesn’t apply to private lenders, which can make paying off a private loan more difficult in the long run. However, you may qualify for short-term repayment relief, which is something to consider if you’re struggling with your finances after graduation. Private lenders may also incentivise on-time payments, which could reduce the overall amount you owe.
Set yourself up for success
Student loans can help you achieve your dreams of higher education but only if you understand how they work. It’s vital to take your time to research, explore and understand all aspects of your student loans, including the different types, interest rates and repayment options. The more informed you are about your student loans, the easier it will be to manage and pay them off in the future.