The Institute for College Access and Success reported in 2015 that nearly 70% of college graduates had student loan debt. As you struggle through the mountain of paperwork required just to get in to college, the subject of student loans can seem confusing. Here’s the breakdown.
Federal Student Loans vs. Private Student Loans
With both of these types of loans you must pay the money back plus interest, even if you don’t graduate, but there are some important differences.
Federal Student Loans
Federal loans don’t require a credit check in most cases. They are based on your FAFSA. Some base your repayment rate on how much you earn after college. They typically give the borrower a little more flexibility on how the loan is repaid.
No credit check makes it easy to get approved for the loan so no cosigner is needed. Students from low income families may qualify for a subsidized loan.
Most people apply for federal loans first, then get private loans for what federal loans won’t cover. Most young adults have not yet developed credit, so to get a private loan, they need someone to co-sign. Private loans may have more fees than federal loans, costing the borrower more in the long run.
Private Student Loans
Private loans come from banks or credit unions. Some schools also make institutional loans.
Private student loans are available with either a fixed or a variable interest rate.
A fixed rate is just what it sounds like. It stays the same throughout the term of the loan. Students always know what their payment is going to be. It doesn’t fluctuate.
Variable interest rate loans have an interest rate that fluctuates. Sometimes the interest is lower than that of a fixed rate loan. Sometimes it’s more.
Some private loans allow a student to just pay the interest while they’re in school. The principal, the amount they borrowed doesn’t go down, but their payment is smaller until they finish school and hopefully have a professional level income.
The payment plan on a private loan usually can’t be changed once the student borrows the money.
What Happens if You Don’t Pay Back Your Loan?
If you miss a payment on your student loan, your loan becomes delinquent. It stays delinquent from the day it is late until you make that payment. If you’re more than 90 days late, the delinquency goes on your credit. Credit delinquencies affect your ability to get credit cards, car loans, cell phones and other important items you’re going to want or need.
Delinquent Loans Eventually Go Into Default
Different loans have different time periods before default, but when it does, the consequences can be devastating to your financial future. The entire balance of the loan becomes due in full. You lose eligibility for further aid, you can be taken to court and your wages garnished. Your school can hold your transcript until your loan is paid.
Know your options before you obtain a loan. Research your options and don’t commit until you find the one that’s right for your financial situation.