About Those Student Loans

on September 10, 2013

College is expensive. We all know it, and it’s getting more expensive with each passing year. And college is more important than ever with college graduates easily out-earning workers without a degree.

Many people take out student loans to help them pay for college. With tuition and fees getting ever more costly, few people can afford the price of higher education without borrowing at some point in their college career. Maybe you already have a few loans of your own.

But what do you really know about student loans?

Two Basic Types of Student Loans

There are basically two types of student loans, federal and private.

• Federal Student Loans – Federal student loans are funded directly by the US Government, by way of the Department of Education. Generally, the interest rates on these loans is “fixed”, and is usually lower than that of private loans. Federal loans can be subsidized or unsubsidized, the difference being that the US Government pays the interest on a subsidized loan for the length of time you are in school. Finally, you can usually defer the interest accrual until the time you graduate or leave school – in other words, the amount owed as interest will not accrue while you’re busy worrying about other things than money!

Private Student Loans – Private loans come directly from private lenders, like banks or credit unions. Interest usually cannot be deferred on a private loan; it begins to accrue from the moment you accept the money. And the interest rate is not normally fixed but, rather, may vary from loan to loan. Depending on your credit score, or that of your co-signer, the interest rate on a private loan can be significantly higher than that of federal loans.

But, unlike federal loans, private student loans can be more flexible when it comes to timing and need. Federal loans are often deadline-driven, whereas private loans can be applied for at any time of the year. And private loans often help fill the gap between the amount a student needs and the amount the government is actually willing to lend. For students whose tuition is greater than the amount they’re able to borrow from the federal government, private student loans can play a very critical role in educational success.

Which is Better?

The answer depends on your preferences and needs. My personal preference is for federal loans. Interest deferment and a low fixed rate mean I can concentrate on my studies without worrying too much about the price of my education. In some cases, though, a private loan might be preferable. Your situation and preferences ultimately decide which is best for you.

Whatever you choose, be careful with your borrowing! Some students see loans as “free money” and borrow too much. But, unlike most other forms of debt, student loans cannot be written off in a bankruptcy. You can never “discharge” your student loan debt. So, be careful and prudent. There’s no such thing as “free money!”


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