The Different Types of Student Loans
written by Frankie Rose.
With student debt totaling $1.71 trillion and the average student debt coming in at $32,731 it is important to pick the right loan, as you will be the one repaying it after all. However, studying can be affordable and possible with the use of loans offered by the governments and the private sector. Student loans comprise money repayable by the students after completion of the course.
There are two primary routes of getting loans: private and government.
Private Student Loans
A private loan resembles a personal loan, as it is financed through a financial institution, credit union, or state loan. It merely bridges a gap between the actual cost and federal loan assistance. The loan is available to both undergrad and graduate students and is based on a credit check. A score of 640 or better is required. However, you may qualify with bad credit as the institution will decide based on future earnings and other factors if you are an eligible candidate. A parent or creditworthy guardian or individual may co-sign on your behalf and are then responsible to repay the loan if you are unable to. Unlike federal loans, there is no subsidy, and you may even have to pay off the loan during your studies. These privately operate so that the legal modulation may not apply. These loans are typically more expensive and may depend on market prices because rates, limits, and terms are set by a private lender. Loan forgiveness and repayment programs are not an option with a private loan.
Federal Student Loans
The government's primary tenable loans come in three different packages. The federal laws modulate the loans and hope to ensure all students can access education regardless of their financial background (Types of Student Loans, n.d.). They are cheaper than private loans because they do not aim for profits.
Direct Subsidized Loans. These are loans to eligible students based on financial needs. It covers higher education costs in the education institutions and recoverable after the completion of the course (Subsidized and Unsubsidized Loans, 2019). A subsidized loan caters to undergrad students with an annual income of less than $50,000. The federal government agrees to pay off the interest either while you're attending college, during a grace period of 6 months after graduating, or during a deferment. The loan is limited to $3500 during year one, $4500 during year two, and $5500 during year three. Students fill forms upon which due diligence processes determine whether they qualify or not.
Direct Unsubsidized Loans They are loans available to offsets some financial shortfalls, even with people with massive wealth (Subsidized and Unsubsidized Loans, 2019). Unsubsidized loans are not based on financial need and are available to both undergraduate and graduate students. You will have to pay off the interest, and payment is usually deferred and postponed until after graduation. The college or university you attend will determine how much money you need to borrow, depending on the cost of attendance and in conjunction with any other aid received. A loan limit is applied and within a range of $5500 and $12,500. You can receive a larger loan if you are financially independent. Both loans are fixed at a 2.75% interest rate. A direct unsubsidized loan is, however, more expensive than the subsidized one. It includes a loan fee of either 1.066% or 1.062% which depends on the disbursement date; there is a subsidy limit of $23,000 and a loan limit of $31,000.
Direct PLUS Loans. These loans also do not depend on financial need and thus require an economic history to determine eligibility. Undergrads dependent on their parents and graduate students may use PLUS loans at a fixed interest of 7.08% and 6.08%, respectively. The loan may cover any educational cost that financial aid does not cover. Bear in mind a credit check is required, and any adverse credit history must then meet additional requirements. Parents with a strong credit score and history may refinance the loan and gain an even lower interest rate.
References
Loans. (2019, June 25). Federal Student Aid. https://studentaid.gov/understand-aid/types/loans
Subsidized and Unsubsidized Loans. (2019, November 13). Federal Student Aid. https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized