What Is A Student Loan
A student loan is money borrowed from the government or a private lender in order to pay for college. The loan has to be paid back later, along with interest that builds up over time. The money can usually be used for tuition, room and board, books, or other fees. But some students use their loan money for other stufflike trips to Jamaica for spring break.
Lets be clear: Student loans are different from scholarships and grants. Loans always have to be paid back . Scholarships and grants, on the other hand, dont need to be paid back . Student loans are also different from work-study programs, where students get paid to work on campus.
How To Apply For A Private Student Loan
Since private student loans are offered by banks and financial institutions , you apply directly to the lender.
Follow these instructions to apply for a private student loan:
It doesnt take long to fill out a private loan application online. If you , it only takes about 15 minutes to apply and get a credit decision.
Applying For A Private Student Loan
Once youve learned everything you need to know about student loans, its time to complete an application with the private student loan of your choice and check to see if you pre-qualify for your desired loan amount.
Pre-qualifying doesnt involve a hard credit check, meaning you can check your interest rates without impacting your credit score. You can check your rates with Ascent in just a few minutes with no application fees.
Many private student loans require a cosigner, while others offer cosigned and non-cosigned student loan options. A cosigner shares equal responsibility for your loan, and is financially obligated to repay the loan if you default on payment or contract terms. It is common for students to use a parent or relative to cosign their loans, but cosigners dont need to be related. Your cosigner can also be a mentor, teacher, or athletic coach you trust.
Some student loans, like Ascents Cosigned Credit-Based Loan, may offer benefits to those who have a cosigner, including lower interest rates or better repayment terms. In some cases, you may also have the opportunity to release your cosigner after making a certain number of consecutive timely payments, which may offer more financial independence down the road.
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How To Calculate Interest
To calculate the amount of interest that accrues, or accumulates, on your loan, divide the loans interest rate by 365.25 the number of days in the year, including Leap Year. This number is the interest rate factor, or the daily rate on your loan.
For instance, a loan with a 5% interest rate would have a daily rate of 0.00013689253.
You can use the interest rate factor to calculate how much interest accrues on your loan from month to month.
Use the daily interest formula:
Outstanding principal balance x the number of days since your last payment x the interest rate factor you figured out above = interest amount.
You can also use MU30s loan calculator to determine how much interest a given loan will accrue.
Whats The Max Amount You Can You Borrow
Your son or daughter cant borrow an unlimited amount of student loans. He or she can only borrow from $5,500 to $12,500 per year for federal subsidized and unsubsidized student loans as an undergraduate. This amount also depends on his or her year in school and whether you can claim your child as a dependent.
Private student loan limits vary by lender. Generally, the amount your student borrows cant exceed the schools total cost of attendance.
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What Is Student Loan Forgiveness
One big advantage of federal student loans is their regulations regarding forgiveness, discharge, and cancellation. All three terms refer to no longer being required to make payments on your student loans.
You may qualify for student loan forgiveness or cancellation if you lose your job or find work in an approved field, such as education and the nonprofit sector. Discharge typically occurs if you become permanently disabled and cannot work.
Parents who take out a PLUS Loan may also qualify for student loan forgiveness if their child’s school closes down or if their child becomes permanently disabled. Additionally, you can discharge some federal loans by declaring bankruptcy.
If you think you might qualify for student loan forgiveness, discharge, or cancellation, ask your loan provider how to apply. Depending on your loan, you may need to continue making payments while the government reviews your application.
How To Apply For Student Loans
Fill out the Free Application for Federal Student Aid to get federal loans. To get private loans, youll need to fill out an application with individual financial institutions.
Shop around to find the right private student loan lender. You can also check with your childs chosen schools financial aid office to see whether it has a preferred lender list. Have a conversation with someone in the financial aid office of the community college, liberal arts college or university your child plans to attend!
Next, compare interest rates, payment terms and fees to find the most cost-effective loan that suits your students needs. Next, complete a full application once you decide on the right loan for you.
Key tip: Only apply for how much you need to borrow.
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When Should You And Your Child Begin
The final part of the understanding how student loans work is learning how to decide when your student should start their loan search.
If your child is destined for college in the fall, and not all of their required funds have been gathered, then now is the time for them to get started searching for the right student loans. Otherwise, they may miss out if they cant pay tuition on time.
Begin by looking through their financial aid packet and see what can be secured there and then determine if other options are needed. If so, its time to get them online to start the search.
If your child is younger than a senior, starting the hunt early spring of their senior year is ideal so that you have options.
What questions do you have regarding student loans? If so, post them below and I will try to get them answered!
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Free webinar on how to secure third-party scholarships for college:
We always suggest exhausting all debt-free options before borrowing student loans. Did you know that it isnt too late to apply to scholarships? Deadlines are as late as August for money for this fall. Join us on our next free webinar to learn more.
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Types Of Federal Student Loans
- Direct unsubsidized loans: These are available to undergraduate, graduate and professional students with no regard for your financial need. Annual limits for direct unsubsidized loans range from $5,500 for first-year undergraduates to $20,500 for graduate and professional students.
- Direct subsidized loans: These are for undergraduate students who show financial need. The government pays the interest on subsidized loans while youre in school at least half time, during your six-month grace period after leaving school and when your loan payments are postponed through deferment.
- Direct PLUS loans: These are for parents of undergraduates, as well as graduate and professional students. PLUS loans may help cover costs that arent covered with other forms of federal financial aid, but they come with higher interest rates and fees than direct subsidized or unsubsidized loans. They also require a credit check.
There are also direct consolidation loans, which let you combine all your federal student loans into one.
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How Much Federal Subsidized Student Loan Money Can You Borrow
The amount of money you can borrow in federal subsidized student loans depends on how long youve been in school.
Currently , first-year students can borrow a maximum of $3,500 a year in federal subsidized loans, while juniors and seniors can borrow up to $5,500 a year.
But even if you qualify for federal subsidized student loans, you may not receive the maximum amount. Remember, federal subsidized loans are need based aid and your total need based aid cant be more than your financial need. If your financial need is estimated at $1,800 that is the maximum amount you can borrow in federal subsidized student loans each year.
How Do I Repay Student Loans
Federal student loans have some of the friendliest repayment terms. These types of loans also offer a six-month grace period. This means youre not obligated to start paying your loan back until six months after graduation.
The standard repayment plan for federal student loans assumes youll pay off your loans within 10 years of graduation. But you can also choose to enroll in an alternative repayment plan. Some of these, called income-driven repayment plans, tie your monthly bill to your discretionary income. There are four types:
Federal student loans also have deferment and forbearance options, which allow you to temporarily stop making payments without hurting your credit score or defaulting on your loan.
Most private student loans have repayment schedules of five to 20 years or more, and many offer grace periods. But keep in mind that interest can accrue while youre in school and during periods when you postpone payments, which isnt the case with federal direct subsidized loans. Private lenders also arent required to offer the same amount of forbearance in case you cant make payments, with limits typically at 12 or 24 months throughout the duration of the loan term. Federal loans offer up to three years of forbearance or deferment, depending on the circumstance.
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What Happens If You Cant Afford Your Monthly Payment
Now listen, you guys: When you take out student loans, you commit to paying back the money. But you mightve heard about some loan-dodging options that let you take the easy way out. Honestly, these options are only temporary, short-term fixes to long-term problemsand sometimes, they can end up costing you more in the long run.
- Forbearance: Your payment is put on hold, but the loan continues to accumulate interest. There are two types of forbearance: general and mandatory .
- Deferment: With deferment, you temporarily dont have to make payments, and you may not be responsible for paying interest on your loan. Not everyone is eligible for deferment or forbearance, but you might qualify if youre unemployed, serving in the military during wartime, or serving in the Peace Corps.
- Student Loan Forgiveness: Again, not everyone qualifies for thisthere are a whole bunch of different requirements, like working full time in a qualifying public service job while making payments for 10 years, teaching in a low-income school for at least five years, etc. The scary thing is, as of May 2020, only 1.3% of applications for student loan forgiveness through public service were actually approved.6 You cant rely on this stuff, yall.
How Do You Get Student Loan Money
Federal student loan money is sent to the college financial aid office while private student loan funds are sent either to the borrower or to the college financial aid office. If the loan proceeds are received by the financial aid office, they will be applied to the colleges charges for tuition and fees, and also room and board if the student lives in college-controlled housing.
Any money left over is refunded to the student to pay for books, supplies and other college-related costs. Check out our blog for more information on student loan disbursement.
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What Are Interest Rates
You pay interest to a lender in order to be able to borrow money. Interest is a percentage ofunpaid principal amount. Direct loans are daily interest loans, which means that interest accrues every single day.
The higher the interest rate, the more youll end up paying on a loan if you take the full loan term to pay it off. Subsidized and unsubsidized loans treat interest rates differently:
- Subsidized loans: The government pays the interest while your student is in school at least half-time, for the first six months after he or she leaves school and during deferment. Deferment is when your child postpones loan payments.
- Unsubsidized loans: The government does not pay the interest while your son or daughter is in school.
| Federal loan interest rates | Private loan interest rates |
| Interest rates are fixed and rates are also usually lower than those for private loans. Here are the current rates:Direct Subsidized loans and Direct Unsubsidized loans forundergraduates: 4.53%for graduate or professional students: 6.08%Direct PLUS loans for parents and graduate or professional students: 7.08% | Can be variable or fixed interest rates can be higher or lower than federal student loan rates. |
Federal Student Loan Advantages And Protections
Compared to the private student loans well discuss in the next section, federal student loans have a variety of advantages and protections.
To start, the interest rates on federal student loans are fixed and low. For loans that were paid out on or after July 1, 2021, and before July 1, 2022, the interest rates are as follows:
- Direct Subsidized and Unsubsidized Loans to undergraduates 3.73%
- Direct Unsubsidized Loans to graduate and professional students 5.28%
- Direct PLUS Loans 6.28%
These rates are lower than those on private student loans or credit cards, making them an appealing option.
It gets better, though. Besides low interest rates, federal student loans offer you a variety of legal protections to make repayment easier:
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Private Student Loan Process
To apply for a private loan you dont need to file a FAFSA. Youll need to apply for a loan with an individual lender. The lender will check your credit score and will often require a creditworthy cosigner.
If you have decided a private loan is right for you, check out our list of the best private student loans to compare lenders.
Take Only What You Need
If youre offered more money than you need, you really should only take what you need, Williams says. Its true for all types of loans: The number one rule for borrowing money is taking only what you needany more, and youre just adding to the amount youll have to repay later.
Student loan amounts can be high, but they are typically capped at whats called the cost of attendance.
The cost of attendance is an annual holistic number calculated by each school which can include everything from tuition and fees as well as room and board, books, lab fees, and other equipment like laptops, says Lauren Anastasio, CFP at SoFi, which offers private student loans and student loan refinancing. Most lenders will cap the amount a borrower can take each year, or semester, based on the cost of attendance of the school the borrower is enrolled in, so its reasonable to expect youll be able to borrow for other expenses, but only up to the amount the university expects those expenses will cost.
The amount youre able to borrow will depend on the school you attend, but there are some steps students and their families can take to reduce the total cost. Many schools require students to live on-campus for one or two years if theyre comfortable doing so, students can opt to live off-campus in their later years of college to save money on room and board and potentially lower the amount they need to borrow.
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Understanding Student Loan Interest Rates
Interest is a percentage of the unpaid principal loan amount that is paid to the lender in exchange for borrowing money. Federal student loans have fixed interest rates and interest is accrued on a daily basis. Interest rates on federal direct subsidized and unsubsidized loans for undergraduates for the 2021-2022 school year is 3.73%. Interest rates on federal student loans are set annually by Congress.
Fixed-rate student loans have an interest rate that stays the same over the life of the loan. Although the rate might start off higher than on variable-rate loans, it wont change as general interest rates fluctuate.
The way interest on private student loans works is different from federal student loans. Private student loans may have either fixed or variable interest rates. Variable-rate loans, also called floating-rate loans, have an interest rate that can vary every month, quarter, or year. Rates usually start off lower than a fixed-rate loan, but can fluctuate dramatically over the life of the loan.
If you expect to pay off your student loans quickly, a variable-rate loan may be an option to consider. But if youre not sure how much youll be making after you graduate, you dont think youll be able to pay your student loans off ASAP, or are risk-averse, a fixed-rate loan might be a better choice.
Private student loans will have different interest rates depending on the lender and the borrowers credit history .
When Do You Have To Start Repaying Student Loans
Federal student loans have a six-month grace period after graduation or dropping below part-time status. You must start making payments after the grace period expires, or request a deferment or forbearance if you cant afford them.
Private student loans may or may not have a grace period, depending on the lender. Whether you have federal student loans, private student loans or both, its important to plan ahead for your repayment so youll be ready when the time comes.
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