Finances & Debt

5 Things to Consider Before You Get a Student Loan

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Student loans are a necessity for most college students these days, which only makes understanding all the options and responsibilities more important for students and parents.

Here are five things to keep in mind before signing on the dotted line:

1. Know your options: The difference between federal, private, state and college loans.

Federal student loans administered and funded by the U.S. government are called federal direct loans. Typically, federal student loans offer the best terms for borrowers, with fixed rates and more flexible repayment plans.

Private loans are administered and funded by private banks. These banks have different rules and regulations than federal loans. They may feature higher – or variable – interest rates, stringent repayment plans and penalties or other terms that may make them more expensive.

Other, less common types of loans include state loans and college loans. In many cases, terms and qualifying conditions for loans administered by your state are similar to federal direct loans. But interest rates and program charges may be higher.

A college, or institutional, loan features the college or university as the lender, with the student borrowing directly from them. The Federal Perkins loan is a good example; although “federal” is in the name, the money is actually distributed at the discretion of the college as a result of the Free Application for Federal Student Aid (FAFSA). These may feature low interest rates and grace periods.

2. Pay close attention to the terms and interest of the loans.

You’ll have choices for terms and interest rates when applying for a student loan. You’ll want to pay attention to:

  • The interest rate. How much are you paying to borrow money? How is the interest rate compounded? (daily? weekly?) Is your interest rate fixed or variable/adjustable? Generally, a loan with a fixed interest rate is recommended, as a variable interest rate loan will change based on market fluctuations – which can be great if interest rates go down, but horrible when they go up.
  • When you’ll have to start making payments on the loan. Will you have until after you finish school before you must start making payments? Most students don’t have enough money to cover student loan payments while they are still in school or right after. Check to make sure you don’t have to start making payments until after graduation (this is standard for federal loans but not necessarily for private loans).
  • How long the loan repayment period is. With a longer repayment period, your monthly payments will be lower, but you’ll end up paying more interest. With a shorter repayment period, your monthly payments will be higher.

You should also see if you qualify for a subsidized loan. With a subsidized loan, the government will pay your interest until you’re out of school – otherwise for most unsubsidized loans, the interest is accruing while you’re in school so once you start paying on the loan, the balance will be quite a bit higher than the amount you originally took out.

3. Verify that your student loan has a grace period.

Many student loans give you a grace period, which is an amount of time you can wait before having to begin making loan repayments. The standard grace period is at least six months from your graduation, but this can vary according to the type of loan you have. Grace periods are beneficial if you’ll need time to earn a few paychecks before making payments.

Note that depending on the type of loan, you may still be accruing interest during the grace period (which means you’ll be adding to the total cost of the loan).

4. Check if your loan offers deferment and/or forbearance options.

You may need to take breaks in payments from time to time. Reasons can include unemployment, economic hardship or military service. Forbearance and deferment can help in these situations.

Forbearance allows you to either stop making loan payments or have them reduced for a certain amount of time. Keep in mind, though, that interest will likely still accrue. Deferment allows you to stop making payments on both principal and interest. Check the details of your loan to see what’s available and what your circumstances must be to qualify.

5. Understand the consequences if you don’t make your payments.

Read the fine print to see what happens if you can’t make your payments. Even partial payments will generally count against you on your credit report and could cause you to default on your loan. The default point varies for different types of student loans, so check your terms before signing.

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