Student Loan: What is it and How does it work

Taking a student loan can be quite an arduous process for a first-timer. This post aims to answer all the questions you might have budding in your mind about student loans. What they are, the considerations you need to get behind before applying for a loan, the different loan types, and how you can apply.

It might not be the most straightforward ride you have been on, but with 70% of college students nationwide borrowing money to finance their education, you are not alone. And it is a temporary sacrifice with long-term gains and an opportunity to meet and exceed your goals.

But first.

What are student loans?

Photo: brookings.edu

Like it sounds, student loans are loans students take out to help pay for school to be paid back later in the future. It is pretty much like any other loan, except that it has some unique attributes. These attributes and other distinctions will be discussed below.

How do student loans work?

While a loan differs from collecting money from your parents or your best bud. There are some things you need to factor in before deciding which type of loan you would consider. These factors are as follows:

⓵ Student loan interest rates

The interest rate is probably the most important factor when deciding the tune of your loan and the type of loan you would be taking. The rate at which you take the loan is essentially the cost of taking out the loan. It is a percentage of the money you are borrowing that the lender expects you to pay back with the original sum.

There are two types of interest rates:

▶ Fixed interest rates: Fixed rates do not change through the course of the loan. They are more common for federal student loans as they are set yearly and remain fixed.

▶ Variable interest rates: Variable interests are set by the lender and change through the loan course. They are more common with private student loans.

⓶ Student loan origination fees

The origination fee is a one-time payment you are required to pay when you take out the loan. The percentage is not fixed and depends largely on the loan type and the lender. Federal loans are usually between 1% and 4%, while private loans do not always require you to pay origination fees. The fees are usually added to your loan to be paid later, so you do not have to worry about paying upfront.

⓷ Student loan repayment term

The repayment term is how long the lender is giving you to repay the loan. How long you have to repay the loan varies by lender and also loan type. The repayment term usually ranges from 5 to 15 years. Still, you must know what the repayment term is before taking out the loan.

Types of student loans

There are two types of student loans, each with its advantages and disadvantages over the other. They are:

① Federal student loans

These loans are provided by the government and are the more flexible loan option. There are many federal student loan options. The best one for you is determined by your year in school, the presence or absence of credit history, and your financial need.

The following are the types of federal student loans available.

⫸ Direct subsidized loans

These loans are available to undergraduate students with financial needs. The amount may not exceed your financial need, and your school determines how much you can borrow. The United States Department of Education pays the interest on the loan for the first six months after you leave school, while you’re in school half the time and during a deferment.

⫸ Direct unsubsidized loans

These loans are available to graduate and undergraduate students alike with no obligation to prove financial need. Your school determines your financial aid, and you would pay interest on this type of loan during all periods.

⫸ PLUS loans

Federal Direct PLUS loans are available to parents and graduates but with a much higher origination fee and interest rate than other federal loans available. You do not need a credit check to apply for this loan, but borrowers need to apply with a co-signer or endorser.

② Private student loans

The meaning of a private student loan and its intricacies are determined by the lender. These loans differ from federal loans in the sense that you do not need to have your credit or income reviewed to apply for the loan. Instead, the loans are granted with a parent or guardian co-signing. As a result, the loan appears on both the student and the co-signer’s financial records.

There are many types of student loans, and they include but are not limited to the following:

• Student loans for bad credit
• Medical school loans
• State loans
• Income share agreements
• Institutional loans
• Credit union loans
• International student loans
• Bootcamp loans
• Bar exam loans

In conclusion

There are many student loan options for every student regardless of their academic level or financial background. For this reason, you must do your research to ensure that your choice of student loan fits your profile and, more importantly, your financial need. Good luck!

FAQs

Q1. How much student loan can I get?

A. The most you can borrow depends on several considerations. These considerations are:

• Your choice of loan, federal or private.
• Your school year

Graduates can borrow a total of $138,500 and up to $20,500 yearly, while undergraduates can borrow $57,500 and $12,500 yearly.

Q2. What type of loan is the best for college students?

A. The best loan option for college students is the subsidized loan. And this is because the federal government offsets the interest on the loan when you are in college.

Q3. What is a guaranteed student loan?

A. Guaranteed student loans are financial aid provided by the government for students to finance their college education. They are backed by government funds and distinct from alternative, personal, or private loans.

Q4. What is the average student loan debt?

A. The average student loan debt sits at about $38,000, while the average federal student loan debt is slightly lesser at about $36,000. Private student loans, on the other hand, are much higher at $55,000 for each borrower.