Know the Different Types of Loans
And How to Manage Them
Private vs. Federal Student Loans
Let’s start with the basics. There are two types of student loans: private and federal student loans. With your first thought, you might be thinking, “Does it really matter? They're basically the same; either way, I'll be taking out money that I'll have to pay back.” In hindsight, you'll learn that these two have their own advantages and disadvantages. To start, let’s look at what these two are at their most basic level.
Federal loans are granted by the government, specifically the Department of Education. These loans will either be subsidized or unsubsidized, something you can learn more about in the next section. Federal loans have set interest rates, decided by Congress, that won't change over the term of your loan. The repayment term for federal loans is set at 10 years but can be extended if you choose to look into different plans. To apply for a federal student loan, you'll have to fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA determines if you qualify for a federal loan, taking into account what your family can pay or your expected family contribution. The FAFSA is something you'll be using a lot in terms of applying for student loans and financial aid purposes. Federal student loans also have better options if you're struggling with repayment by giving you 270 days before default versus the 120 days for private loans, many helpful repayment plans, and more!
Private student loans can be a little trickier, as they can have many other options. A private student loan is any loan that is not provided by the government. These loans will be issued by a bank, credit union, or any other private company. Unlike federal loans, you'll have to pay interest on these through school and have fewer benefits than some federal loans that pay your interest while in school. The interest rates on private loans tend to be higher and can be extremely high, some being over 18.00%. The repayment options on these loans may be limited and they don't offer loan forgiveness programs. Credit scores and a possible cosigner may be required to take out a private loan as well. You may be thinking, “Why would I ever take out a private loan?" In some cases, they're just necessary. Private loans can be beneficial when you need a bigger loan amount or don't qualify for a subsidized student loan. Interest rates vary, but it may be a good option if you plan on refinancing once you get an awesome paying career after school.
Subsidized vs. Unsubsidized Student Loans
Student loans can be extremely complicated and intimidating. Hopefully by the end of this, you'll have a better understanding of two of the major types of student loans. When applying for a federal student loan, they'll be either direct subsidized or direct unsubsidized. Private loans are a whole different beast, which we'll also dive into. But first, let’s focus on federal loans as they are the most common. Subsidized and unsubsidized loans (sometimes called Subsidized Stafford Loans and Unsubsidized Stafford Loans) have their similarities and differences. Knowing about each one is important when deciding how you'll tackle paying off your loan in the long run and how the interest works for each.
A subsidized student loan is a loan that the government will pay interest for while you're in school. This means that if you apply for a principal loan of $20,000 as a freshman, your loan will still be for $20,000 after four years because the government paid for the interest costs. Not a bad deal, right?! If you put your loan into deferment or forbearance after graduation, they'll also pay the interest on your loan. Another great thing about subsidized loans is the fact that no payments are due until six months after you graduate, commonly known as the grace period, allowing you some time to find a job—which is a huge stress reliever. The downside of a subsidized student loan is that they're only for students who have financial struggles. If your parents make over a certain amount of income each year, then you won't qualify. You can find out if you're eligible for a subsidized loan by filling out and submitting the Free Application for Federal Student Aid (FAFSA). A maximum loan amount for a borrower is $23,000, so you may have to borrow more through unsubsidized federal loans or a private loan. Sadly, graduate students don't qualify for subsidized loans.
Unsubsidized student loan is the more intimidating of the two. With no help from the government, these loans can grow bigger and bigger over time. Even though they're offered by the federal government just like a subsidized loan, the government doesn't give a helping hand in terms of interest payments. This means that the same $20,000 student loan you take out as a freshman could become $25,000 by the time you graduate if you do not pay the interest. This puts more responsibility on the borrower as you're responsible for paying the entire interest on an unsubsidized loan, even during that lovely grace period as well as any deferment or forbearance. Up until now, you might be thinking, “Why would I ever want an unsubsidized student loan?” Well, they do have a few advantages. Graduate students can also apply for these loans along with undergraduates. You also don't need to prove that you need financial help, so anyone can qualify for one. The maximum loan amount is also higher at $31,000 per borrower, so you can borrow more than a subsidized loan.
Now we can talk about the similarities between subsidized and unsubsidized student loans. The first shared trait is that your school determines the amount you will be able to borrow. The school will offer you a financial aid package detailing the amount you can take in subsidized and unsubsidized student loans. The interest rates for both are the same at 4.45% for undergrads and 6.00% for subsidized graduate loans. But remember, with subsidized loans you do not have to pay any interest while you are in school!
If you qualify for a subsidized student loan, it's clearly the easier and better choice as you don't accrue interest during school and in your grace period after you graduate. You can save a lot of money, but not everyone qualifies for this type of loan. Unsubsidized loans can get be more expensive, but sometimes you just don’t have a choice. It is important to remember that you must pay attention to your loan, especially the interest, and stay on track by making payments toward your principal. Making small payments while in school can help tremendously! Remember, you're not alone with your student loan!
National Student Loan Data System
You're having a great time in college, so thinking about a student loan you took out might not be the No. 1 priority in your head. Or maybe you just graduated from school and enter that sweet, sweet grace period. For six months, you may be relaxing or taking a vacation, proud of your accomplishment as you should be. But then the harsh reality hits and you start thinking about how much student debt you have. Whether you've taken out multiple student loans or just one, it's hard to keep track of everything you owe.
For federal student loan borrowers, the National Student Loan Data System (NSLDS) can become one of your best friends. The NSLDS is a one-stop shop for knowing everything about how much you owe on your student loan. Most people take out multiple loans from different lenders and loan servicers while they're in school, so it can get difficult trying to keep track of how much you owe in total. The NSLDS is sent all the information about every aspect of your loans from your college including: the date you took out the loan, how much you borrowed, the interest, status of payment, and the type of loan you have—whether it be subsidized or unsubsidized. It also shows who your current servicer is, as they often sell your loan to another company. The major limitation of this extremely helpful system is the fact that it doesn't hold information on private loans. But if you have federal loans, use the NSLDS. It is there to help you manage your loans and your payments accordingly.
It's easy to sign up! Click this link to start: https://www.nslds.ed.gov/nslds/nslds_SA/. Go to the “Financial Aid Review” and then “Create an FSA ID.” You'll need your social security number to sign up, so have that ready! In a few minutes, you'll have access to all your loans and be on the way to a game plan to pay them off!
