Taking out a student loan may be the only way to make college affordable. But it’s a good idea to learn about the different types of student loans available and what your repayment options will be after you graduate.
Making some informed decisions about your finances before the school year begins can help put you on the fast track to financial success after graduation.
If you haven’t been able to secure college grants or scholarships, and don’t have the means to pay for higher education yourself, student loans may just be your only alternative for covering the high cost of college.
Use this brief guide to help you choose the right student loan that meets your needs:
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TYPES OF STUDENT LOANS
There are several different types of student loans to choose from, and some have better repayment options than others. Your choices include:
- Federal Family Education Loan Program (FFEL) — provided by private lenders, including banks and credit unions, and are guaranteed by the Federal Government.
- Federal Direct Student Loan Program (FDSL) — funded directly by the U.S. government.
- Stafford Loans — subsidized or unsubsidized loans with low interest rates. If you’re not eligible for a loan from a private lender and can demonstrate financial need, this is the loan for you. (Note: with a subsidized loan, the government pays the interest on the loan while a student is in school).
- PLUS Loans — low-interest loans that parents can apply for on behalf of dependent undergraduate students.
- Perkins Loans — a type of federal loan that is designed to assist students who have an extreme financial need. These are subsidized loans and have very low interest rates.
- Consolidation Loans — these will combine existing loans into one loan so that you can lower your monthly payment and if you choose to, have your payback period extended.
- Private or alternative loans — student loans issued by private banks and lenders. These can help to cover college expenses that are beyond the government loan limit.
A word to the wise: You should always seek federal loans before trying to get a private loan.
Federal loans have better loan forgiveness options, and better alternatives if you run into financial trouble and need to get a loan forbearance or deferral. Additionally, federal loans charge lower interest rates and fees, and provide greater flexibility in repayment options.
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STUDENT LOAN INTEREST RATES
Student loan interest rates and repayment options vary by type of loan and the date of disbursement. Here’s a breakdown of your repayment options for all loans disbursed between July 1, 2011 and June 30, 2012
:- FFEL Subsidized Loans: Fixed rate of 3.4% for undergraduates, fixed rate of 6.8% for graduate students
- FDSL Loans: Fixed rate of 3.4% for undergraduates, fixed rate of 6.8% for graduate students
- Stafford Loans: 4.5% for undergraduate students, 6.8% for graduate and professional students
- PLUS Loans: Fixed rate of 7.9% for parents, graduate students and professionals
- FFEL PLUS Loans: 8.5% for all students
- Consolidated Loans: The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.
- Private Loans: Interest rates vary by lender; but rates in the 8% to 12% range are common, according to FinAid.org, a college financial aid site.
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LOAN REPAYMENT OPTIONS
You typically have four repayment-plan options for federal student loans. Private loans have their own guidelines for repayment, and repayment plans can vary by lender.
The four main repayment plans for federal educational loans are as follows:
- Standard Repayment — you agree to pay a fixed amount for the loan up to 10 years, depending on the amount of the loan. The minimum payment requirement is $50 per month.
- Extended Repayment — the loan term is extended to 12 to 30 years to reduce the monthly payment. This gives you more monthly cash flow, but you wind up paying more in interest charges over the life of the loan.
- Graduated Repayment — this repayment schedule begins with lower payments so that you can afford payments as you start your career, and then increases gradually every two years. The loan term can range from 12 to 30 years, and the monthly payment must be at least $25.
- Income-Contingent Repayment — your payments are contingent on your income level and will be adjusted annually as your income or family size changes. The maximum repayment period is 25 years. After 25 years, any remaining student loan balance is discharged, or forgiven.
No matter what student loans you decide to take out in order to pay for college, it’s important to realize that repaying college debt is serious business.
If you default on a student loan, you risk damage to your credit rating, being barred from getting future educational loans, and potential wage garnishment.
Read these tips for more advice on how to fix a defaulted student loan and check out these calculators from FinAid.org to find out how much a college loan will cost you.
Lynnette Khalfani-Cox is a weekly money and finance columnist for BlackEnterprise.com and founder of the free financial advice blog, AskTheMoneyCoach.com. Follow her on Twitter @themoneycoach and see her column every Tuesday on BlackEnterprise.com.