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Wondering how student loans work? Here are the differences between federal and private student loans, including interest rates, repayment plans and how to apply. (iStock)
What The Interest Rate On Federal Student Loans
Borrowing money can be a complicated process, especially when you're taking out a loan for something as important as financing your education. With headlines declaring America's student loans a "crisis" and federal student loan forgiveness on Capitol Hill, you may be wondering how student loans work — and whether they're a good way to pay for college. Good idea
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While student loans can be a helpful tool, no financial solution is right for everyone. Before signing for a loan it is important to understand how student loans work.
If you need a student loan, comparison shopping is an important way to make sure you get the best one for your situation. Makes it easy to compare personal student loan rates from multiple trusted lenders.
Student loans are special loans designed to help you finance your education. You have to pay them back with interest within the agreed repayment period. Depending on the type of loan and the terms you agree to, you may be able to pay off your loan after you graduate or drop out of less than half-time enrollment.
Before you consider taking out a loan to pay for college, you should first exhaust all of your free aid options. Complete the Free Application for Federal Student Aid (FAFSA) to see if you may qualify for grants, work-study, or other federal aid. Once you tap those options, you can think about student loans.
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If you're thinking about taking out a loan to pay for college, it's best to start with federal student loans.
These loans have fixed interest rates that are generally lower than private student loans and are easier to qualify for. In addition, federal student loans come with benefits and protections that private loans do not offer, such as:
Most federal student loans do not require a cosigner or credit check. The Department of Education offers several types of federal student loans:
Federal student loan limits vary based on the type of loan you borrow and whether you are an undergraduate or graduate student.
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Banks, financial institutions, and online lenders typically offer private student loans, which may have fixed or variable interest rates. Unlike federal student loans, private lenders will consider your credit score and other financial details.
To get a loan from a private lender, you need to submit an application with detailed information, such as your address and income. Loan terms and interest rates will vary based on the information you submit and whether you are an undergraduate, graduate or professional student. Some lenders offer parents private student loans, or the option to be a cosigner.
When you've exhausted your federal aid and loan options, private student loans can be a way to bridge any funding gaps. Lenders can offer you different repayment terms, but you can't take advantage of programs like federal loan forgiveness.
If you're considering a private student loan, comparison shopping can help you make sure you're getting the best rate and deal available to you. With Trusted, you can easily compare personal student loan rates from multiple lenders – without affecting your credit.
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Unlike federal student loans, whose dollar amount limits are set by law, the amount you can borrow with private student loans depends on the lender. Many lenders have a minimum amount you must borrow and the maximum amount is usually your cost of attendance at school.
Remember, however, that private lenders consider your ability to repay the loan when determining how much you can borrow. They will look at your current debt (if any) and consider how much of your monthly income will go toward paying off your personal student loans.
If you're a student, you may not have much credit history or income. A personal lender may require a cosigner with good credit and sufficient income if you are unable to repay the loan.
When you're ready to apply for student loans, here are the steps you'll need to take for each type of loan:
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Once you accept the terms of the loan, the lender will disburse the funds to your school. In return, your school will first apply the money to your tuition, fees, and on-campus housing. Any remaining funds will be distributed to you, usually at least twice per academic year.
The amount you pay in student loan interest depends on how much you borrow and whether you have a fixed- or variable-rate loan.
Federal student loan interest rates are fixed, meaning you'll pay the same rate and predictable monthly payments throughout your loan. Fixed interest rates can cost you less overall because federal student loan interest rates are lower than private student loan interest rates.
With private student loans, interest rates can be both fixed and variable. With variable interest, the rate can change based on market conditions, causing your monthly payment amount to change. Although many variable rate loans charge low interest initially, the rate can increase over time, meaning you could end up paying more in interest.
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When and how you have to repay your student loans depends on the type of loan you took out.
For Direct, FFEL, and Grade Plus federal student loans, you don't have to start paying off your loan until six months after you graduate, drop below half-time enrollment, or drop out of school — called the grace period. For Perkins loans, the grace period is nine months, and for Parent Plus loans, there is no grace period.
All federal student loans begin with a 10-year repayment period, during which you will make fixed principal and interest payments. You can also choose a graduated repayment plan that increases your payment amount every two years over a 10-year period. Or, you can choose an extended repayment plan that gives you 25 years to pay off your loan with fixed or graduated payments.
If you're having trouble making your payments under one of these plans, you can switch to an income-driven repayment (IDR) plan that adjusts your monthly payment based on your income and family size.
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It's important to note that by giving you more time to pay off your loan, IDR plans can pay you more interest over the life of the loan.
Borrowers may have several options for paying off their student loans, but it depends on the lender. When you apply for a private student loan, you can choose from a variety of repayment terms.
Interest usually accrues as the loan is disbursed, although some lenders allow you to defer payments until graduation or if you drop below half-time enrollment. A lender may allow you to make interest-only payments while you're in school or pay a fixed amount each month that can go toward both interest and principal while you're in school.
Before taking out a private student loan, find out what terms each lender offers. Trusted makes it easy to compare offers from multiple private student lenders in minutes. Hanneh Bareham By Hanneh Bareham Arrow Right Student Loan Reporter Hanneh Bareham specializes in all things student loans and helping you finance your next educational endeavor. Her goal is to help others reach their college and financial goals by making student loans easy to understand. Connect with Hanneh Brehm on Twitter Twitter LinkedIn Email Hanneh Brehm on LinkedIn Connect with Hanneh Brehm via Email
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Edited by Chelsea Wing Edited by Chelsea Wing Arrow Edited by Chelsea Wing Right Student Loan Editor Chelsea has been around since early 2020. He is invested in helping students navigate the high costs of college and break through the complexities of student loans. Connect with Chelsea Wing on LinkedIn LinkedIn Chelsea Wing
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