Low rates. No fees. Just money for college.
Ask anyone how they feel about their loan payments and you might see a wide range of reactions, depending on where someone is in the repayment process. Many agree that further education is a valuable asset, but student loan debt and how to pay for college can be a much trickier subject.
Why Student Loans Can Be Good
Financial aid, scholarships, and student loans open the door to ownership of a valuable asset that you might not have the cash on hand to afford upfront. A college degree is arguably one of the most valuable assets you could invest in at 18 years old, and, combined with hard work, can pay dividends over the course of your life.
By providing the ability for many people to invest in themselves, education loans help those whose families couldn’t save money as they would have liked for school.
But, taking out student loans can be a problem for students who don’t get over the finish line – they have the debt but not the degree and the higher earnings that typically come with it. If you’re considering borrowing to pay for college, it’s important to have a plan to ensure you finish. It’s also important to ensure the loan amount you’re considering borrowing matches your career path after graduation.
Federal Student Loans: Pros and Cons
One major benefit for many young people headed to school but lacking a solid credit history is the majority of federal loans don’t go through an underwriting process and don’t require a credit score. Underwriting is when the lender reviews your credit history and other indicators to decide your eligibility and what interest rate you will be offered on your loan. Private loan lenders do this to rate your risk of defaulting during loan repayment.
Today’s federal loans have the same loan terms and an annual interest rate that is fixed according to a government formula for all borrowers taking on the same type of loan. For example, if you and your neighbor borrow a direct loan in 2019-20 for this year of your undergrad education, you will both have an interest rate of 4.53%.
Another benefit offered to undergraduate students is subsidized loans. This means the loan won’t accrue interest until the borrower enters the repayment term. Not taking on interest while in school is a major benefit and could mean major savings over the life of your loan. The federal government offers subsidized student loans to students whose families demonstrate financial need—based on information about family income submitted through the FAFSA.
If you were to return to school or military service your federal loans could also qualify for deferment. Deferment means that you can postpone making loan payments at that time. In addition, you might not be responsible for paying the interest that accrues on certain types of federal loans during this time. By comparison, forbearance is a period when you are not required to make student loan payments to your loan servicer, but interest will continue to be added to your total payment amount.
Some federal loans also have repayment plans that can lead to loan forgiveness after a number of years and on-time monthly payments. These programs can take a long time – 20 to 25 years – before you could potentially qualify for loan forgiveness and in the meantime, you may have paid more than anticipated. Another program, Public Service Loan Forgiveness, can be a faster option for people employed by the government or certain nonprofit organizations but has very specific requirements so you will want to constantly make sure you are on the right path for these benefits.
Even if you aren’t working towards loan forgiveness, federal loans offer a range of repayment options that take the borrowers’ income and a basic cost of living allowance into account to limit their monthly payments.
One thing to be aware of is that federal student loans have borrowing limits. With ever-rising tuition at many colleges, you might choose to take on additional loans to cover the annual cost of attendance.
Private Student Loans: Pros and Cons
While federal loans do offer certain borrower protections that private lenders do not have, such as income-based repayment or student loan forgiveness, private student loans can play an important role to help you pay for college.
If a student hits their federal borrowing limit before finishing school they can take on a private loan to fill the gap and finish their degree. Private loans, in addition to covering the entire cost of attendance, also have rates that are based on the credit profile of you and/or any cosigner you have. This may mean higher or lower interest rates than those offered by federal loans if you have excellent credit (or even good credit).
Private student loans can also offer variable interest rates for borrowers. Federal loans only offer fixed interest rates, and variable rates may be lower than fixed rates. It is important to keep in mind that variable rates can change over the life of the loan and could eventually mean a higher rate than the fixed rate.
Knowing the pros and cons of borrowing for college is important to making good choices for how to finance your education. Many students use federal loans and then fill the gap with private loans. Regardless of the types of loans you tap, it’s important to borrow only the minimum you need to cover your educational expenses and ensure you’re on the path to graduation.