Contents
A student loan is a huge sum of money provided to a student by the government at the federal or state level, or a private company to be used for tuition or other educational expenditures. They must, however, repay the money plus interest after graduation.
A student loan is a sum of money borrowed to pay for post-secondary education or expenses associated to higher education. Education loans are designed to pay the costs of tuition, books and supplies, as well as living expenses while a student is pursuing a degree. Payments are commonly extended while students are still studying, and depending on the loan provider, repayment may be deferred for yet another six months after graduation. This interval is otherwise called to as a “grace period”. Student loan just like grants and scholarships is very helpful to students in financing their studies.
Types Of Student Loan
There are two main types of student loans; government and private student loan. The main objective of student loans is to help student finance their studies and ease the stress that comes with funding their education. However, they both have little distinctions in their mode of repayment and loan limits.
Government Student Loans
Government student loan is commonly called federal student loans. It is the best type of loan for student because it has a fixed interest rate which helps in offsetting it after school. Repayment of government loans is also flexible and if certain conditions are met, the loans can be forgiven.
The loan limits for government student loans is subject to your study year and status (dependent or independent). Dependent students are students who have the financial support of their parents or guardian. When applying for student loan from the government, these students will be required to report the income of their parents or guardian. Your loan will be determined by their income. The higher the income, the less the financial aid rendered. But generally, dependent students’ loan limit ranges from $5,500 to $7,500 up to a total of $31,000.
Independent students on the other hand, as the name implies do not receive financial aid from anyone; payment or guardian for groceries nor housing. If you are married, in a graduate studies, have a child or another student who is dependent on you or above the age of 24, you are considered an independent student. Generally, graduate students’ loan limits ranges from $9,500 to 12,500 in a year, hence, amounting to $57,500 in total. Independents students are required to report their income and that of their spouse, if married.
Types Of Federal Loans
There are four major types of federal loans;
Direct unsubsidized loan:
Students can apply for unsubsidized loans irrespective of their monetary need. Interest starts to accrue as soon as the funds are received and continues till the loan is fully repaid. Independent students who apply for a direct loan may be eligible for a higher amount more than dependent students. There is no requirement to pass a credit check before getting direct unsubsidized loans. It is the best for independent students( students who receive no financial support from parents) because it has a fixed, low interest rate and there are several plans of repayment. If you can, you can pay the loan early, there will be no penalty. However, to remain eligible, each year, you have to file a new FAFSA form.
Direct subsidized loan
Though both direct subsidized and direct unsubsized loans are part of federal direct loan program, direct subsidized loan is given to student who demonstrate financial need only. It is better than the unsubsidized loan because it is not as expensive as unsubsidized loan as the government subsidizes the loan interest for at least, half of the time the student spends in school, during the grace period and during deferment periods. The cost of attendance and year in school are huge factors in determining the the loan amount that will be given to you.
Direct PLUS loan
Direct PLUS loans are designed for graduate for graduate or parents of dependent students. It has a fixed interest rate though interest accrues while the student is still in school, unlike direct subsidized loan, it is not subsidized. In order to be eligible for direct plus loans, borrowers will be subjected to a credit check. An origination fee will be removed from the loan before it is given to you or the school, this fee is for processing the loan.
Direct Plus loans is of two types;
The Grad PLUS Loans and the Parent PLUS loan.
The Grad PLUS loan is for graduate and professional degree students. To be eligible for the Grad PLUS loan, student must be enrolled in an eligible school for at least half-time and pass a credit check and must be a citizen or non- eligible citizen and student of an eligible school.
Parent Plus LOAN is designed for parents of dependent students to pay for expenses not included in the students’s financial aid package. One of its perks is that it does not have a total limit to the amount that can be borrowed. The loan is expected to be paid by the parent(not the student) after graduation. To be eligible for Parent PLUS loan, you must be the biological or adoptive parent of the student and pass a credit check or get an endoser and the student in turn must be enrolled in an eligible school for at least half time. You must also be a citizen or eligible non-citizen to qualify for Parent PLUS loan
Both the Grad PLUS loan and Parent PLUS loan have low, fixed interest rates and have flexible repayment plans, for example, payment can be delayed until after graduation.
Direct Consolidation Loan
Direct Consolidation Loan is a type of federal loan that helps to combine several school loans into a single one. The benefit is that instead of making different monthly payments for each of the loans, you will be making just a single payment monthly for all other loans since they have been consolidated. Forgiveness programs and more repayment options is made available to students on Direct Consolidation.
Private Student Loans
Private loans are typically obtained from banks or other private companies and, due to interest rates, often wind up costing more than federal loans. They may also demand students to begin repaying loans while still enrolled in school. The majority of students only apply for private loans after they have exhausted all of their federal financial aid options.
Consider the fees connected with private student loans before committing to one. You’ll have to pay a lending charge to the vendor, who may or may not give you much leeway in terms of choosing a loan payback plan, and repayment terms vary per vendor.
Furthermore, private loans are frequently unsubsidized and may be subject to an annual quota, restricting the amount of financial assistance accessible. Private loans have varying interest rates depending on the loan provider. Other factors such as the credit history of the student as well as the cosigner can affect the interest rates on private loans.
How Student Loans Are Paid Back
The standard repayment plan is 10 years after graduation, however, this is only applicable to federal loans. Private lenders for instance have different repayment plans, some may offer offer a period of six months or more after graduation as grace period(the period when you are yet to start repaying your loan) while some go longer than that. Though there several repayment options borrowers can choose from to repay their loans. Each of the options will be briefly explained below;
Standard Repayment Plans
The standard repayment plan is the default repayment plan for federal student loan borrowers. In this plan, you will be required to pay back your loan for a period of 10 years after you graduate. Your monthly payment is fixed and continues like that throughout the duration of 10 years. your monthly rate will be determined by the amount you borrowed and its interest rate. This is the best repayment plan anyone can go for because just in ten years, you will be debt-free. As soon as you are out of debt quickly, you will be able to save and invest.
Income-Based Repayment
Income based repayment plan is designed for Direct loan; both subsidized and unsubsidized, GradPLUS loans and consolidation loan. The borrower will be paying 15% of their income every month for a period of 25years. Then after paying for 20 to 25 years, borrower can then be qualified for Loan Forgiveness. This repayment plan is best for people who have high debt to pay but are low income earners.
Graduated Repayment Plan
Graduate repayment is a plan that allows students to repay their loan for a period of ten years but unlike standard repayment plan, monthly payment is not fixed, it starts slow and increases continuously every two years. This repayment plan is best for students whose salaries are expected to increase over time.
Extended Repayment Plans
This plan allows students to repay their loan for a period of 25 years. As against 10 years standard repayment plan, it gives room for extension. Not all borrowers are eligible for this repayment plan. To be eligible, you must have up to $30,000 debt in student loan. You will be required to pay your low amount for the lengthened period of 25 years without loan forgiveness.
Revised Pay-as-You-Earn Repayment Plans
This plan allows borrowers to pay off their debt by paying 10% of their monthly income for a period of 20-25 years and forgives the remaining debt.
Income-Contingent Repayment Plans
Students on this plan are allowed to pay off their debt gradually. The payment rate is determined by the discretionary income of the borrower, not the amount of the debt
After graduation, most federal student loans have a six-month grace period before repayment is required. When the grace period expires, you must begin making monthly and on-time payments. Each month, a fixed amount of interest is applied to your payment.
Consider a direct loan consolidation option if you’re taking out multiple federal loans. These programs combine federal loans from many lenders into a single loan that you can pay back using a normal, extended, or income-based repayment plan.
A federal student loan normally takes ten years to repay, whereas private student loans take five to fifteen years.
Loan Forgiveness Program
Student loan forgiveness means you won’t have to pay back the loans you took out to pay for college. It’s a program for people who borrowed more money than they could afford to pay back.
The federal government, on the other hand, does not simply wave a magic wand over everyone’s debt. You must meet certain criteria to be eligible for forgiveness, which might be difficult because one of the most common requirements is 10 years (120 months) of consistent, on-time payments.
Private lenders hardly forgive loans. The only way that can happen is if you are disabled for the rest of your life or if you die.
What Happens If You Miss Your Payment
If you don’t make your payments on time, your loan may default. Missing payments are allowed for nine months on federal loans, while only one missed payment is allowed on private loans.
The federal government can use your tax refunds to offset your debt if you default on a loan. This can harm your credit score.
Given these dangers, you should pick your repayment plan carefully to guarantee that you can keep up with your monthly payments. Applying for loan rehabilitation or loan consolidation, both of which allow you to negotiate with your lender for lower monthly payments, may help you avoid default.
If you miss a payment, there are a few options for lessening the implications. To begin, requesting a loan forbearance or deferment halts payments for a certain time. Unfortunately, interest may continue to accrue during this time, increasing your debt and stopping your loan repayment or forgiveness progress. Deferment and forbearance can provide you time to switch to an income-driven repayment plan that better matches your salary.
Conclusion
Taking student loan is no doubt one of the ways by which students fund their education. You don’t have to worry about your debts while you study as you are not required to pay back until after graduation. There is even a grace period of six months after graduation before you begin your repayment. There are several repayment plans to also choose from. If you want to offset your debt in the shortest time possible, you can go for the standard repayment plan where you pay a fixed amount every moth for the period of ten years after graduation or graduate repayment plan that increases every two years if you expect your income to increase over the years. As you apply for student loans to fund your education, you should also think of the repayment plan that would work for you.