Students who wish to pursue a college degree but don’t have the funds can apply for a student loan. Unlike scholarships, where you don’t have to repay the amount, student loans have to be repaid with interest. Most students prefer a federal loan, as it offers more benefits than a private student loan. Here, we’ll discuss how exactly a student loan works, the different types, the best student loans, and other essential factors.Shutterstock
How does a student loan work?
In simple words, applying for a student loan means borrowing money for your education. The bank lends you a particular amount so that you can study; however, like any other loan, you must repay with interest. This means the sum to be returned is higher than the borrowed amount. Let’s say you borrow $12,000 (principal amount) for your college degree, and you have to pay a percentage of interest on this amount. If the interest is $2,259, you’ll have to repay the principal amount along with interest, i.e., $12,000 + $2,259, which comes to $14,259.
Before applying for a student loan, it’s essential to compare the interest rates of different lenders. The interest can vary depending on the type of loan, principal amount, and other factors. You can start repaying while you study or once you graduate.
Different kinds of student loans
Individuals who wish to fund a college education can apply for three types of loans: federal, private, and refinancing. The government provides federal loans, whereas you can apply for private loans and refinancing loans from financial institutions, unions that offer credit, or states. Here, we’ll understand the distinguishing factors between federal loans and private loans and list their subtypes:
1. Federal student loans
Loans granted by the government are known as federal loans. Federal loans are much more affordable and come with an array of perks. Besides, it’s easier to get a loan from the government, as most loans don’t require a co-signer. They also offer flexible repayment plans, making it easier for you to pay back. You can choose from four different categories of federal loans:
- Direct subsidized loans
Undergraduate students who require financial help for higher college education are eligible for direct subsidized loans. In this case, your school determines the loan amount you’ll need to complete your education. The government pays interest on a direct subsidized loan while you’re attending school half-time, six months after you finish school (grace period), and during a deferment period (when you pause payments for some reason).
- Direct unsubsidized loans
Unlike direct subsidized loans, direct unsubsidized loans are granted even when you’re financially secure, and both graduates and undergraduates can apply. Colleges are responsible for deciding the amount needed. However, a significant drawback is that you yourself have to pay the interest while attending school, during the grace period, and even in case of postponement. If you fail to do so, the accumulated interest will be combined with your principal amount.
- Direct PLUS loans
The direct PLUS loan is granted to students who’ve graduated college, working professionals, and parents whose children want to pursue an undergraduate program. Individuals from all financial backgrounds can apply, but the borrower must have a good credit history. If you don’t have strong credit, you’ll need to meet additional criteria to qualify. Just like other loans, the school determines the principal amount.
- Direct consolidation loans
If you have multiple federal loans, you can consolidate them through this option. You then only have to pay the average of the interest of all the loans, i.e., one payment every month. This makes it easier to keep track of your loans and reduces the stress of paying multiple amounts. The federal government provides this option at no cost. However, private loans may not be eligible for consolidation. Also, you can consolidate only once you complete the course, withdraw from college, or get past half-time status.
2. Private student loans
If you can’t get a federal loan, you can apply for a private student loan. But it’s best to consider this only after all the options for a federal loan have been exhausted. Banks and other financial institutions offer loans to students who wish to study further. They’re divided into the following categories:
- State-specific loans
You can get a private student loan through several financial agencies. The Iowa Student Loan Education Lending, Bank of North Dakota, and the Rhode Island Student Loan Authority are some state-specific agencies. Anyone living in these states can apply for a private loan from these institutions. You can apply for a college within the state or outside. Since the criteria for each loan differs from state to state, it’s best to check with the institution of your choice and decide accordingly.
- Degree-specific loans
Private lenders provide degree-specific loans to individuals who wish to pursue a particular profession. Loans are offered for a medical, law, dental, or business degree. Banks also provide loans to individuals who want to attend community college. Furthermore, you can also apply for a loan to study for a bar exam. Every financial institution has a plethora of options to choose from, and you can inquire with them to figure out the correct option for yourself.
- Bad credit loans
Some financial organizations provide loans to students with a bad credit score. Ideally, you should apply for a federal student loan first and consider this option a backup plan. But remember, although the institution will approve your loan, the interest rates are very high in this category.
- International student loans
Students who are citizens of the country or those with a specific visa can easily apply for a federal student loan. But it’s hard for international students to get a loan. Therefore, a few lenders provide facilities to international students who may not have a strong credit history. Still, most of these companies require you to have a co-signer who is a citizen.
- Income share agreements
This plan is suitable for those planning to pursue a high-income profession. Unlike a traditional loan, you don’t have to pay monthly installments to repay the loan. Instead, you have to repay the amount once you start earning. Banks take a percentage of your income over a fixed period. It’s vital to understand the income percentage and repayment terms before going for this option.
How to apply for a student loan?
Applying for a student loan is easier than you think. But the process can differ depending on whether it’s a federal or private loan. Let’s take a look at both these processes:
1. Federal loan process
If you want to apply for a federal loan, here’s a brief outline of the process:
- Fill and submit a Free Application for Federal Student Aid (FAFSA) form. The form requires you to enter specific financial information and other details.
- Your school or college will analyze the form and reply with a financial aid offer listing a series of federal student loans you’re eligible for and how to go about the process.
- After your loan is approved, you’ll be asked to complete entrance counseling – a 30-minute session that explains the terms and conditions of the contract and your responsibilities.
- You must now sign a Master Promissory Note in which you promise to repay the principal amount along with interest and agree to the terms.
- On completion of the above process, the private lender will transfer the funds to your bank account.
Each school has a different process of providing financial aid, so it’s better to get in touch with them and understand their method.
2. Private loans process
When it comes to private student loans, each lender responds differently. So you’ll have to get in touch with each private lender separately to understand their process of loan approval. Usually, financial institutions require you to have a co-signer with solid credit. That’s one common parameter among all lenders; the rest differs from lender to lender. The same applies to refinancing loans. You’ll need to get in touch with your loan provider and ask for the specifics of the process.
How much can you borrow?
Loans come with a borrowing limit. For direct unsubsidized and direct subsidized federal loans (for undergraduate students), the loan amount can be anywhere between $5,500 to $7,500 for dependent students. For independent students, the per-year amount comes up to $9,500 to $12,500. Since different amounts are applicable for every school year, you can visit the official government website to get a breakdown of the costs. Graduates and professional students can borrow up to $20,500 each year.
When it comes to private lenders, the maximum loan amount and interest rates can vary depending on several factors. Hence, it’s best to borrow exactly how much you need. The lesser the borrowing amount, the easier it is to pay back.
Best student loan providers
Choosing the right student loan can be a task. While only the government provides a federal loan, hundreds of financial organizations provide private student loans, making it hard to decide. To make things easier, we’ve listed some of the best student loans you can consider:
- College Ave
College Ave is one of the best student loan providers in the market. The company is known for offering undergraduate loans, graduate loans, parent loans, and even refinancing student loans. Plus, you can avail of multiple facilities like flexible payment options and loans with a low-interest rate. Undergraduate student loans come with a low variable interest rate of 0.99%, including a discount of 0.25% on choosing the autopay option. The fixed interest rate could be as low as 2.94%, which again includes the 0.25% autopay discount. College Ave allows you to pay back the loan using different options, such as Flat Payment, Full Principal & Interest Payment, Deferred Payment, and Interest Only Payment.
RISLA, or Rhode Island Student Loan Authority, is another top student loan provider in our country. If you repay the loan immediately, RISLA’s interest rate will be around 2.99%. Those who wish to go for the deferred payment option will get an interest rate of 4.74%. Both options have an auto-payment discount. RISLA offers other flexible repayment options as well, such as Loan Forgiveness for Qualifying Internship and Income-Based Repayment. You can also delay your repayment in case of a financial emergency. Moreover, if your credit score and other details are in place, you can opt for a multi-year loan without reapplying.
- Splash Financial
Splash Financial is known for loan refinancing, a service that combines different student loans to make repayment easier. It offers a variable interest rate of 1.89% and a fixed interest rate of 2.44%. Both the options come with a 0.25% discount on the autopay option. And if you make 12 monthly payments consecutively and on time, you’re eligible for the release co-signer option. Moreover, spouses can refinance their loans together. However, anyone who wishes to choose this company must borrow a minimum amount of $5,000. There’s no maximum amount that can be borrowed.
Taking a loan for your education is a huge responsibility. Hence, it’s crucial to go through all the terms and conditions before applying. When you decide to borrow, check the interest rates, repayment options, and other essential details. Once your loan is approved, create a plan on how you’re going to pay it back. It’s better to start paying the interest as you complete college. If that’s not possible, devise a strategy to pay back your student loan once you finish graduation.