by Hannah Johnson
Student loans are something most students must consider to go to college. It is important to understand the differences between federal and private loans as well as what can go wrong if you can’t pay it off. Student loans aren’t meant to be something scary, but sometimes, things don’t go as planned and they can turn scary. Here is what you need to know about private and federal loans for college.
In order to get a federal loan, you must first fill out The Free Application for Federal Student Aid (FASFA). The FASFA is an online form that is filled out each year by you and your parents to help determine your eligibility for aid. This is then sent to the college of your choice and, if eligible, they will give you a financial aid package laying out how much money the government and school is willing to cover for you.
There are multiple types of federal student loans, the first are Direct Subsidized Loans and Direct Unsubsidized Loans. These will be a part of your financial aid package and will be something you must pay back later. Both loans will be determined by the school and will not need to be paid until after your six-month grace period after you graduate. The only difference between a Subsidized loan and Unsubsidized loan is that the Government will pay the interest on the Subsidized loan whereas with Unsubsidized, interest continues to accrue while you are in school. The good thing about these types of loans is that the interest rate is very low.
The second type of loan is the Federal Perkins Loan. This loan is also determined by your school and you will make your payment to the school rather than the government later. The interest rate for Perkins loans is five percent.
The last type of federal loan is the Direct PLUS Loan. To be eligible for this loan as an undergraduate student you must have a parent willing to take the loan out for you. This will also be determined by the school and will cover the remaining balance after financial aid. The current interest rate starting October 1st is 4.264 percent which went down from last year’s 4.276 percent.
With private loans, you must find a private loan service provider. Your local bank may have options for you as well as some online companies like Sallie Mae. There are pros and cons to both private and federal loans.
With private loans, you can consolidate after you graduate with some companies or banks if you would like to just make one payment rather than two or four depending on which type of school you are going too. With federal loans, there are programs such as the Public Service Loan Forgiveness program and interest based repayment options.
Just like with all things there are cons to both sides. With private loans, sometimes the interest rates are higher but you have less of a chance of going into default on your loan. Default is when you cannot afford to pay the loan according to the terms in the documents that you signed when you accepted it. This will cause the government or lender to take legal action to get the money back. With federal loans, default can take away everything that you have. In some cases, you can even lose your driver’s license and house if you can’t pay off your student loan.
Student Debt Crisis is a non-profit 501-C4 advocacy group. The C4 gives them the ability to do things more politically and be more active. They are fundamentally dedicated to reforming the way that we pay for higher education in America. “We have learned that there are ways that they [borrowers] can help, especially with federal loans, so we do trainings and one on one help with student loan borrowers that are looking to lower their payments or look into getting into the public service loan forgiveness programs. We do webinars and public presentations all free of charge,” said Natalia Abrams, Executive Director of the company.
Even though federal loans are better than private, sometimes it’s not possible to completely cover the cost of your education with just federal loans. “There isn’t often enough money to pay for the high cost of tuition.” If you are going to take out a private loan, you can look at the Consumer Financial Protection Beau to look at complaints and issues with private lenders to make sure that you are not going to sign up with the wrong company.
There are two types of interest rates you can get with a private loan. A fixed interest rate, and a variable interest rate. Variable interest rates are often lower but will fluctuate. Fixed rates are often higher but will stay that way for the life of your loan. There are pros and cons to both situations and a variable interest rate isn’t the end of the world, but it is important to understand what you are getting into before signing any documents.
There are ways to avoid getting behind on payments one of those ways is refinancing. Once you graduate, you will have a six-month grace period and in that, you can refinance your loans. This just means that you’re going to get one big loan to pay off your smaller loans so all you have is one combined payment rather than your individual ones. This has helped a lot of people, but again it is important to read the fine print when going to a refinancing company because sometimes they have teaser rates that will then sky rocket after a few years.
Student debt is a big problem and that’s why Student Debt Crisis is trying to change the way we pay for our higher education. 44 million borrowers are in debt 1.4 trillion dollars. This is just counting Federal loans, not private. “Many policy analysts have been trying to figure out what that real number is… it could be 1.8 to 2 trillion if we look at the full scope of the problem.”
5 Best Pieces of Advice:
1.) “When applying to school, try to take as many federal loans as you can and do an exhaustive scholarship search”
2.) “Once you graduate, look for an income based repayment program if your struggling to make your minimum payments. Income Based Repayments take ten percent of your income to pay off your loans. “If your making zero dollars, then ten percent of zero is zero.”
3.) “The landscape is rapidly changing with the new administration so you need to pay attention to what is going on because many of the programs are at risk with the new budget.”
4.) Pay off your loans as soon as possible. This goes for both federal and private. If you have to work two jobs during your summers off from school, do it now so you don’t have to do it after you graduate. “I know some people want to bury their heads in the sand because $80,000 debt load or more can seem overwhelming but the worst thing that you can do is not pay attention and not be on top of it.”
5.) “Get involved. For us, share your story. It is so important for others to know that people are struggling with student loan debt. Getting the word out there, I think that is how we are going to change the landscape of this.”