When you hear about student loans, the conversation usually revolves around either the amount of loan debt facing students or different stories about paying back those loans. Honestly, these are most talked about because this is what people often get paid to talk about. Something less talked about, but arguably more important, is financing student loans.
Determining the best way to finance any student loans usually falls to parents. Although giving your child a crash course in the debt they’re building wouldn’t be a bad idea.
Either way, when you’re looking into financing student loans, it is essential to know how your options behave. There are advantages and disadvantages to them all, and the more information you have, the better position you will find yourself in when making your decision.
Discover our recommendations for financing student loans
When we talk about financing student loans, two main options always come up: federal loans and private loans. While there is a bit of variety within each category, this is where to focus.
Federal loans come with many features that are not available in private loans. Some of those features include:
- Potential loan forgiveness – If you work in public service after graduation, you may be able to have some of your student loans forgiven.
- Subsidized loans depending on the need – A subsidized loan gathers interest differently than unsubsidized loans. With a subsidized loan, the government will cover any interest accrued on a loan while the student is still in school, during the grace period after leaving school, and during deferment periods. This can make a difference in thousands of dollars in the overall payments you have to make over the lifetime of financing student loans.
- No prepayment fees – While private loans might penalize you for paying off your loan early (a way of making sure they get a healthy profit from the loan), a federal loan will never penalize you for early payments.
- Postponement options and payment plans – Since these are government loans, there tend to be more postponement or payment plans. The government would like to see you succeed and has no interest in having you default on loans. If you have a genuine need, there is a good chance they’ll work with you as much as they can.
- Lower interest rates – Generally speaking, interest rates for federal loans are going to be lower than with private loans.
While it may seem like federal loans are the obvious way to go after reading their advantages, there are advantages to private loans. Understanding how to take advantage of personal loans is vital if you have to use this option. The main benefits of financing student loans through the private sources are:
- Increased borrowing limits – While federal loans have limits, private loans are far more flexible. Private loans often come into play when there is a gap between what federal loans will cover and the amount of money needed.
- Rewards for quality credit – Federal loans carry the same interest rates regardless of how much you borrow or who is borrowing the money (excluding subsidized loans where the interest rate is partially covered). A private loan will lower your interest rate based on your credit score. While it is not typical to get an interest rate below what is available with federal loans, private loans can sometimes go as low as 3%.
- Potential expiration – Defaulting on a loan should never be the plan, and, if you’re going to college, you should be thinking of a way to make decent money when you get out. Still, there may be an added feeling of security in knowing that private loans have a statute of limitations. Beyond ten years, it becomes difficult for lenders to collect on the debts. With federal loans, the government will get its money even if it has to garnish your wages. Again, defaulting on loans creates its very own set of challenges and should never be a part of the plan.
For almost everyone looking into student loans, the process will involve seeing what you qualify for through federal loans and then making up the difference in private loans. Knowing why and how each one works to your advantage can give you a hand up in the long run.
What kinds of struggles have you experienced while working with organizations for financing student loans?