What you need to know about student loans before borrowing

Editor’s Note: This article originally appeared in Living on the Cheap.

Are you considering taking out a student loan for your education or your child? Here’s the basic information you need to know.

Federal student loans aren’t always better

Back in the day, private student loans were ridiculously expensive and had varying interest rates. So, over a 10-year repayment period, you could get a 4% interest rate, or a 12% interest rate.

Payments can not only exceed $1,000 per month, but can fluctuate by hundreds of dollars as interest rates change.

Private student loans are now available at fixed interest rates. This interest rate does not change and is often lower than the parent loan interest rate.

Compare interest rates on federal parent loans to interest rates granted by lenders such as SoFi.

Loans to students and loans to parents are very different

Interest rates for Parent PLUS loans are higher than traditional undergraduate student loans, prices for income-based repayment plans are higher, and the only limitation is the cost of attendance.

For example, let’s say it costs you $30,000 a year to attend school, including room, food, and textbooks. Her first year dependent undergraduate cap is $5,500 for her.

If parents are eligible, they can borrow even more, up to the full cost of attendance minus all other student aid. So a parent could easily end up with her $100,000 in debt from her child’s bachelor’s degree.

Private student loan credit rating and income issues

Whether a private loan is for a parent or a student, credit rating and income matter.

Students with limited credit history and obtaining a loan in their own name can obtain a loan with a parent or other higher credit co-signer.

A co-signer is someone who agrees to repay a loan if the primary borrower is unable to do so. Therefore, they will have equal responsibility for the loan and the loan payment history will also be on the co-signer’s credit report.

Credit ratings may also determine interest rates. For example, a person with a high credit score may qualify for an interest rate that he or she has 2 percentage points or more lower than someone with a low credit score.

There are different types of federal student loans

For students, most federal student loans are issued as subsidized or unsubsidized loans.

Interest on subsidized student loans is paid by the federal government while the student is in school with at least half-time status and in some other circumstances. must be used to its limit before it can be used.

Non-subsidized loans are available for the remaining amount that students are eligible to receive within their normal borrowing limits. The gap is filled with the Parent’s Her PLUS Loan or the Alumni’s Her PLUS Loan. Private student loans also fill the gap.

You do not have to borrow the full amount awarded. I cannot stress this enough.

Compare financial aid packages, call the financial aid office to apply for more scholarships, and inquire about local and departmental scholarships as well. If you are in or recently in high school, ask your high school counselor for help finding scholarships.

Different repayment terms and conditions

The repayment period ranges from 5 to 30 years. The 5-year repayment is for private student loans only, but varies by lender.

Some lenders have the option of a 15-year repayment period. In general, the longer the repayment period, the lower the repayments.

The longer you borrow, the more interest you pay, but you can always pay off your loan early. There is usually no penalty for doing this.

The standard repayment period for federal student loans is 10 years. There is a 20-year plan where payments are based on income, and an extended payment plan for up to 25 years.

consolidated loan

You have a consolidated loan with a repayment term of up to 30 years, and your repayments do not increase based on your income growth.

The benefit of consolidating your loan is that you may qualify for Public Service Loan Forgiveness, a program that allows you to have your remaining balance forgiven if you work for your public service employer for 10 years.

Student loan consolidation allows borrowers to combine multiple federal student loans into one federal student loan.

A consolidation loan allows you to pay off multiple loans in one payment, but the amount of interest you pay can increase over time.

know your options

Sound complicated? maybe.

Taking out student loans is a decision that involves comparing interest rates, long-term protection against financial emergencies, and avoiding overborrowing.

The best way to make the decision easier is to fill out the FAFSA (Free Application for Federal Student Aid) to learn all the federal options available to you. Next, talk to your financial advisor, college financial counselor, or high school counselor about what your choices mean for your family’s future.

It’s better to spend a few hours making an informed decision about borrowing now than worrying for years about how your loan payments will affect your finances later.