Tuition is expensive, not to mention that tuition alone is not the only part of a college education. A student needs books, clothes, things to eat, etc. All of that — on top of studying full-time (or almost full-time) and not having a chance to work and earn their own living. Sure, for some kids, the process is easier than for the others, but the sad truth is — not every family can support a child through college.
This, of course, does not mean that getting a job right after high school is the only option — student loans can help one get the education they dream of. So, let's take a really good look at what student credits are, what it takes to get approved, how they work, and how soon they'll have to be repaid. Perhaps, college education should not be such an unattainable dream, even if your family is not precisely rich.
Quick & Simple Definition of a Student Loan
A student loan is a long-term credit students can spend on their tuition and any other education-related expenses. Simply put, it's a pretty large sum of money you receive and repay over time. Usually, students are not supposed to return anything until they graduate — and even then, they are often given a grace period of six months to start with the monthly payments.
Of course, like every other lending option out here, student loans come with interests. Most borrowers tend to think of it as a fee, and — in a way — it is. This commission is the percentage from the initial sum you receive, and just like the lending itself, it will have to be returned over time, in several successive payments. Most student loans come with fixed interests, meaning that the percentage you owe does not change — even if it takes one ten years to return the sum (and it often does). However, there are also variable fees, which can be recalculated anytime — based on the current economic situation or any other factors influencing this situation.
This is a very quick, generalized definition, but in practice, student loans can be very different. We'll discuss the most common types, along with their pros and cons, in the paragraphs below. But first, let's answer a truly exciting question — who can those education funds, to begin with?
What Do You Need to Get Approved for a Student Loan
For starters, student credits can be either federal or private. Federal ones are sponsored by the government, which is why they will not be available in just any college. Private credits have fewer restrictions, but — often — higher interest rates. We'll dig into more differences between these two types a bit later, but for now, let's imagine you are applying to a prestigious school, meaning that both credit types can potentially cover your tuition.
So, what are the initial requirements for the prospective applicant? Quite a lot of things, actually:
- Citizenship or a permanent residentship (Green Card);
- Social security number;
- High school diploma;
- Registration with the selective service for men aged between 18 and 25;
- Enrollment to a certain school.
This is a must-have start, and the rest will largely depend on the particular type of loan you're trying to receive. In any case, students will have to contact their school's financial aid office and fill in a special application form. The form itself is pretty simple, but it does not always ensure 100% success.
Besides, there are a couple of other financial requirements for the prospective candidates. Usually, people who apply for borrowing are supposed to have some kind of proven credit history, which is hardly ever the case with youngsters fresh from high school. So, young people often need a co-signer to apply for any kind of loan, even a student one. Having a financially stable co-partner practically shifts most responsibility to this person — most often, one of the parents.
Another suggestion to increase your chances of approval (when talking about federal funds) is to try and minimize the sum you ask for. Applying for a grant or a scholarship is a great start, and many promising students get financial help from their colleges. Getting a scholarship is an excellent opportunity. First, it increases your chances of a successful application. But, what's even more important is that you end up owing less money than you would have without a grant. So, returning the debt becomes easier and often requires less time.
Still, even meeting all of these requirements does not fully guarantee that a government will sponsor you all the way through college. They may lend a part of the sum you hope for, or deny your application request entirely. So, let's dig deeper into the differences between federal and private credits — because you might need some help from private companies no matter how high your grades are.
Federal Versus Private Loans: Major Differences
We already covered the main difference — federal funds are issued by the state, and they usually have lower, fixed interest rates. Private ones may have fixed or variable interest — it all depends on the particular service. While federal credits are harder to come by, it makes sense to start with them. At the very least, students should try their luck getting some money from the state first.
Federal Loans Pros & Cons
We already mentioned lower, fixed interest rates as the major benefit of federal funds. However, there is more:
- No need for a co-signer
- No need for a good credit score
- Flexible repayment conditions (for example, you can negotiate regular monthly repayments depending on how much you actually earn after graduation)
- A possibility to temporary pause the payments
- A chance to subsidize the interest (that is, make sure none of the interest debts stack up while you study)
- Forgiveness options for those who cannot pay back (this usually implies doing charity or some other nonprofit work for the government).
That all sounds pretty slick, but to every plus, there is a minus. In particular:
- No chance for bankruptcy (one will still have to repay doing nonprofit work)
- Strict limits (one may not get the whole sum they hope for)
- Even stricter limits for students dependent on parents (with no income of their own)
- Interest rates, while fixed, can be pretty flexible and are way higher for some students than the others.
- Very high interest rates for grad students.
Still, despite some pretty obvious disadvantages, all applicants are strongly recommend to try getting some help from the government first. At the very least, they can receive a certain sum from the state and cover the remaining expenses with a private loan.
Types of Federal Loans Explained
- Direct Subsidized Credits: this means that your interest gets calculated only after your graduation. While still in college, the clock is not yet ticking.
- Direct Unsubsidized Credits: the opposite of the above option, meaning that your debts start accumulating immediately after approval.
- Parent PLUS: the kind of credit that heavily relies on parents' financial status and repayment abilities. Requires a thorough credit check because parents bear part of the responsibility for this borrowing.
- Direct Consolidation Loans: a government program that allows students to consolidate all of their debts. For example, if you get a federal lending for some expenses and a private one for some other expenses, you can roll them into one. In the end, you'll still pay the state.
Limits on Federal Education Funds
That largely depends on the program you're applying for and the requirements you're supposed to meet. Besides, just like interest rates, limits will differ for undergraduates and graduates. Undergraduates can usually borrow $12,500 annually and $57,500 total from the state. Grad students can only receive $20,500 annually and $138,500 in total.
Private Credits Pros & Cons
In comparison to federal programs, private credits do have a couple of perks, such as:
- Quicker and easier application procedure
- Not limited in sums one can borrow
- Additional discounts for automatic repayments
- Do not always require a co-signer
- Co-signer can be released from obligations
On the other hand, private credits do have their disadvantages, some of which we've already covered:
- Higher interest rates
- Interests are often variable
- Obligatory credit check
- Repayment logic is not as flexible
- No possibility to temporary stop the payments
- Shorter deadlines on repaying the debt
- Shorter deadlines on delayed payments
Considering all the above, no wonder that many people see private student lendings as a last resort. However, they can be pretty helpful if you're covering only part of your education expenses. For instance, if you get a grant from school and some tuition borrowing from the government, it's a great idea to consider an additional sum from a private company.
Can a Private Education Loan Be Used on Anything
In contrast to federal credits, private lending can cover more expenses than mere tuition. Still, it's not a personal credit per say, so it does not mean that one can just go clubbing or vacationing on this money. It can, however, cover:
- Books and equipment
- Minor personal expenses, etc.
So, any private borrowing can be used on a number of personal things. Sure, no one can strictly forbid you from spending any money on fun things (because they technically fall under personal expenses). Still, students should keep a clear head when dealing with their borrowed money because they will have to repay every single cent of it — with interest. For freshmen students, it all may seem too far away, but time does fly. So, be cautious.
How to Choose Private Companies for Education Loans
Obviously, you have to choose loans that offer the most favorable repayment conditions for you. Here are some things to focus on:
- See which lenders collaborate with your school;
- Compare interest rates among different companies: choose in favor of low ones whenever possible;
- Stick to fixed rates whenever possible;
- Check if there any discounts for automatic payments: those could be pretty helpful after graduating and getting a job;
- See if there are any discounts for quicker repayment.
Also, do not forget about the requirements prospective students will have to meet to apply. They may vary from one lender to another, but the standard package includes:
- Enrollment to a certain school;
- Good credit score (for parents or other household members);
- Citizenship or permanent residency.
Private Student Loans Application Process
Choosing a private lender with low, fixed interest rates, who is available in your college is the most time-consuming part. Once you've made up your mind, the rest is pretty simple:
- Fill in an online application form. It usually takes up to 15 minutes, and applicants get an automatic notification if they pre-qualify.
- Stay in touch and wait for the approval. Usually, private companies will reach out to you quickly enough, but it may still require a couple of days.
- Sign all the necessary documents after carefully reviewing them. Often, this step requires a co-signer.
- Take the papers to your school's financial department. They will certify the loan, taking care of all the remaining details pretty much by themselves.
- When all is settled between the school and the lender, the money hits your school balance account. If there are any extra funds, the school automatically returns them.
How Do You Repay an Education Loan?
After students graduate from college, most of them will have a grace period (up to six months) before the repayment cycle begins. Supposedly, a person with a degree gets a job within this timeframe and secures oneself a stable income. And, quite logically, part of this income goes to return the debt.
Most federal funds must be repaid in ten years, even though there is always a way to negotiate other terms. For example, some federal credits repayment logic may be based on income. If the latter one is low, it might take longer than ten years to cover the debt in its entirety. So, it could be possible to agree on an extended plan — paying less every month, but taking longer to repay.
A similar logic applies to private lenders as well. Most of them will be sending a newly employed graduate a monthly check that has to be covered. It's also possible to agree on automatic repayments. This way, an agreed sum will automatically be transferred to the company account every month. Often, such a scheme is complemented by the interest reduction rate.
For any young professional with a stable income, auto-payment is a good option. First, you reduce the amount of debt (a bit). Second, you do not need to do anything — everything happens automatically. Finally, it alleviates part of the emotional burden — you don't feel like constantly returning the debts. Psychologically, it's like nothing happens because the money you owe never even reach you, personally.
What Happens If You Delay or Cannot Pay Your Education Debts?
When borrowers are late on their monthly payment, they are considered delinquent. If one fails to cover the accumulated debt within 120 days (on private credits) or 360 days (on federal ones), such borrowers go default — meaning that they have failed their obligation. And here the fun begins because private companies can sew people, while the state can intercept salaries (if any), try to repossess creditor's property, and so on.
So, if you suddenly find yourself temporarily unemployed, with no wage account to deduct your monthly payment from, you should immediately contact the lenders. You might be able to figure something out because not repaying your education debt is a terrible idea that can have drastic legal consequences.
Still, not to finish on a sad tune, repaying a student lending is entirely possible. Basically, it all goes down to being a good student (first) and a good employee (after graduation). Both ensure a solid, stable income and an opportunity to gradually cover all tuition debts — without too much effort or hassle.
Repaying will come even easier if you do a little more research before applying. Consider average salaries in your future professional field and try to figure out how much money will be left for your personal expenses after paying a fixed monthly debt. Calculate how much time it'll take you, too. Finally, stay a responsible borrower and spender and only use your borrowed money for education-related expenses.