It seems that student loans will forever be in the headlines. At least, it will be until we have successfully lowered it. But that is hardly what we think will happen. After all, people still believe in the power of a college education. In fact, college debt is considered to be a good debt. People think that a college education will allow young adults to earn more.
While that is true, it is not something that should put you under so much debt. For some people they can get an education without putting themselves through high amounts of debt. The problem was, they were unaware of their options to finance their college education. At least, they were not aware of the options that will lower their need to borrow too much money.
According to a study done by PewResearch.org, student loans have become a burden to a lot of Americans. Not only is the amount continually increasing, the number of people who are struggling to pay back the loans is also growing. That is a big problem for a lot of people.
And as it continues to be a problem for Americans, it will slowly but surely affect the national economy as well. Since young adults are burdened with debt, they are unable to invest their money in other things. They find it hard to buy a home, a car and even start their own business.
In case you are an incoming college student or a parent, you may want to learn what you can about student loans so you can make smart choices about the financial aid that you will get.
Comparing Federal with Private student loan debt
To begin your fight against the student loan crisis, you need to make sure that you are properly informed first. There are so many concepts and programs to learn if you want to really educate yourself about this type of debt. But let us start with the two options that you have: federal and private students loans. There are specific types of student loans but these two are the categories that covers all of them.
Federal student loans are those that are backed by the government. This is actually what most people prefer to borrow because you get a lot of benefits. Here are the important facts that you need to know about this type of loan.
- The amount of money that you can borrow from federal student loans is limited. This is usually why borrowers opt to apply to as many programs as they can.
- Most of the time, you have to qualify for these loans and it usually involves being in a difficult financial situation. Those who need greater financial aid may qualify to apply for subsidized loans. These type of loans will prompt the federal government to pay the interest on the loan on your behalf – at least, while you are still in school, during the grace period or while in deferment or forbearance.
- Federal loans have a lot of repayment programs to help you comfortably pay back what you owe. Some of them are based on your current income. You can also apply for Direct Consolidation Loan, deferment or forbearance.
- There is a chance that you can have your debts forgiven – if you are eligible to apply for it.
- Student loans backed by the government have a fixed interest rate. Although the rate and cap interest rate changes every year, it is only applicable for loans that are first disbursed during that period. Whatever rate you got on your first loan disbursement will be the rate you will follow for the duration of your repayment plan. The interest rate is also tax deductible.
- No repayment is needed on the loan while you are still in school. Not only that, there is a grace period from the time that you left school (as a graduate, lower than half-time enrollee or a dropout) until the first payment is due.
- There is no need for a credit check – unless your parents are borrowing a PLUS loan for you.
- There is also no cosigner needed for students to borrow their own student loans.
- No prepayment penalty is imposed in case you decide to pay more than what is scheduled.
- Collection efforts for federal student loans can be very aggressive. It can garnish your sages even without a court order. Also, they can take your SSS and disability benefits. Even your tax refunds can be taken from you. While it can be discharged by bankruptcy, it will be very difficult to do so.
Private student loans, on the other hand, are borrowed from private lenders like banks. They have different characteristics compared to the other type of loan.
- Most of the private lenders will ask you to start payments even while you are still in school.
- Private student loans have higher interest rates – some are even higher than 18%. Private lenders offer both fixed and variable interest rates and neither of them are tax deductible.
- Unless you have a good credit history, you need to get a cosigner to help you get approval for your loan. Your interest rate and the whole cost of the loan will depend on your credit score.
- Your debt may be imposed with prepayment penalties – depending on the lender.
- Private loans cannot be consolidated under the Direct Consolidation Loan. Also, most of the private lenders do not offer benefits like forgiveness, deferment and forbearance.
- Borrowers cannot be threatened with wage garnishment unless there is a court order. Government benefits like SSS or disability benefits and tax refunds cannot be threatened too.
It seems that the obvious choice between the two is to apply for federal student loans. But do not be partial with only one. There are so many differences between the two and knowing them will allow you to make a wise choice regarding what loans you will get to fund your college education. Most of the differences cited here were taken from StudentAid.ed.gov. You can visit the site to learn more about these two loan types.
How to be smart with your college debts
Battling student loans may seem like a daunting task but it can be done. There are people who have successfully paid off their debt without letting it ruin their financial future. Here are a couple of tips that will help you get started in the right direction.
- Borrow only what you need. Ideally, you want to use your loans to pay for your tuition and other school related expenses. You should not use it for entertainment expenses. If you can work part time while studying, that is a better idea. At least, you can use your salary to pay off your board and lodging – that should be a huge relief financially.
- Exhaust your federal student loan options first. Obviously, the better choice between federal and private student loans is the former. Exhaust all possibilities with that type of loan before you borrow from private lenders.
- Understand your repayment options. When applying for a loan, make sure that you look further ahead to your repayment. Know your options so you can set yourself up to an easy repayment plan after school.
- Do not borrow other debts. Do not make things worse by borrowing other types of credit. You do not want to deal with the stress of having to choose between student loans and credit cards. Give yourself only one problem at a time. Do not use your credit cards irresponsibly if you still have a lot of student loans to pay for.
Keep yourself updated. Lastly, keep yourself informed. The federal government comes up with a lot of new programs or extensions to existing programs that can help you pay off your debts. Even private lenders are also making revisions. According to an article from Time.com, Wells Fargo and Discover both have plans to offer loan modification programs that will provide relief for those suffering from temporary financial difficulties. These include interest rates and lower monthly payments. Make sure you learn and understand these new options so you can give yourself some relief from these burdensome student loans.