Understanding Student Loans In 2019
There is no doubt that higher education is expensive and it’s no wonder why so many people turn to student loans. Most colleges cost a fortune. Even if you’re thinking about going to trade school or a boot camp you could be paying more than $14,000 in tuition fees!
Luckily, there are tons of student loan options to help you with tuition payments. There are also government grants offered by certain accredited schools. In this article, we’ll explain all your student loan options. We’ll even go over options for trade schools, certificate programs, and boot camps. And we’ll also explain private and federal student loans. By the end of this article, you’ll have a great understanding of your true cost of higher education.
Compare Your Student Loans Options
If you’re considering applying for a student loan to help pay for school, you’re not alone. Many students need loans to cover their full cost of attendance. In 2018, it’s estimated that around 69% of students used loans to pay for their education. Yet, the more money you borrow now, the higher your monthly loan payments will be after you graduate.
If you need to take out a student loan, understanding your options is going to help you find the right student loan.
Federal Student Loans And Private Student Loans
If you choose to take out student loans, you have two choices. Understanding the differences between your loan options is a big step in making a financial plan to repay your loan. Once you understand your options, you’ll also want to learn about grants and scholarships in this article.
Federal Student Loans
Students will benefit most from federal student loans. Federal student loans usually have a fixed interest rate. Fixed rates mean when you go to pay back the loan, you’ll have a clear understanding of what your payments are after graduation. In some cases, the federal government will pay the interest on your loans while you are in school – these loans are called subsidized loans.
Private Student Loans
Other student loans are generally private student loans. The most common private student loans are offered by banks. Their interest rates are often variable, which means your interest rates and payments could go up over time. Private loans can also be more expensive – rates have been as high as 16% over the past couple of years. And when it is time to repay, private loans don’t offer as many options to reduce or postpone payments.
What Is A Direct Subsidized Student Loan?
A direct subsidized loan is a federal loan where the federal government pays the interest of the loan while the student is in school. The government will pay the interest on a subsidized loan if you’re enrolled in school at least half-time.
Students are not required to pay interest on a direct loan while in school, but, interest starts to grow immediately. Someone needs to pay that interest, or that interest is added to the original amount of the loan.
For example: If a student takes a $10,000 direct subsidized loan as a freshman, four years later, the loan balance will still be $10,000. With direct subsidized loans, the government pays your interest costs. The amount of the loan will not grow because the government makes the payments for you.
Direct subsidized loans are designed for lower-income, undergraduate student borrowers. According to the Department of Education, your school decides the amount of direct subsidized loans you’re able to get. The amount borrowed with a subsidized loan cannot exceed financial need.
Direct Subsidized Student Loans | Advantages
- The U.S. government will pay the accruing interest on your subsidized loan so long as you remain enrolled as a student for at least half-time status.
- Interest is paid by the U.S. government on eligible loans during deferment and forbearance, as well as on certain repayment plans.
- No payments are due until after the first six months of graduation.
Direct Subsidized Student Loans | Disadvantages
- Graduate students don’t qualify for subsidized federal student loans.
- Students who can’t prove financial need — which can happen if parents earn too much — cannot qualify for this type of financial aid.
- Annual loan limits are lower for Direct Subsidized Loans than for Direct Unsubsidized Loans. The total loan amounts are capped at $23,000 for subsidized loans.
What Is A Direct Unsubsidized Student Loan?
Direct unsubsidized loans don’t offer more financial help. The unsubsidized loans are still offered by the federal government but the gov will not pay the interest on the loans while you are a student.
With an unsubsidized loan, the student borrower handles making the interest payments as soon as the loan is taken out. If the student does not make the interest payments, the payments are added to the principal/original amount. A $10,000 loan taken in freshman year might grow to $13,000 by graduation, due to the interest accruing and being added onto the principal.
The government does not pay interest on direct unsubsidized loans. These loans are general loans not based on financial needs. Student borrowers must repay their debt in full, interest and all.
Direct Unsubsidized Student Loans | Advantages
- Both undergrad and graduate students can apply for direct unsubsidized loans.
- Student borrowers don’t need to prove financial hardships to qualify for the loan.
- Yearly loan limits are higher than subsidized loan limits and have a total loan cap of $31,000.
Direct Unsubsidized Student Loans | Disadvantages
- Student borrowers are responsible for paying all the interest on their loans. Even during the grace period after graduation and including during deferment or forbearance.
Subsidized Loans And Unsubsidized Loans | Parallels
Even though there are some major differences in both of these types of loans, there are some major similarities and parallels to be aware of. Below we list out some of the major parallels to help you better understand loans as a whole.
- Borrowing: Your potential school will determine the amount you’re able to borrow on your loan. When you complete and submit your loan documents, your school will offer a financial aid package. This package will outline how much money you can take on a subsidized or unsubsidized student loan.
- Financial Aid Term: For both of these federal loans the longest eligibility period is 150 percent of the length of the college program you’re enrolled in. For example, if you attend a full, four-year undergraduate program, you’ll qualify to receive six years’ worth of loans.
- Interest: The average APR for undergraduate subsidized and unsubsidized loans should around 4% – 5% . The unsubsidized graduate degree loan interest rate should be around 5% – 6%.
- Fees: Both loans have should have relatively the same fee.
Comparing these two different loan types may not need an extra look at the above criteria.
Subsidized Loan VS Unsubsidized Loan Payback
If you have both loans out, you’ll want to focus on paying back your unsubsidized loan first. It’s generally a good idea to pay off the loan with interest first. Get ahead of the game and pay down as much as debt as you can before you start paying back your other non-interest accruing loan. Take advantage of the fact that one loan may not have interest accruing. Pay off as much as you can of your unsubsidized student loan so you are prepared to pay off more of your subsidized loan when you graduate.
For example, a $30,000 loan at 4.45% interest would gain $1,335 in interest over one year while your loan was in deferment. If the loan was an unsubsidized loan from senior year and you didn’t pay interest during the year, your balance would be $31,335 at graduation. You’d have to pay interest on $31,335 while your direct subsidized loan would still be at $30,000 so you’d pay interest on a lower amount.
You save money on accruing interest by paying back the loan with the higher balance first. And repaying your direct unsubsidized loans first means that if you go back to school or otherwise qualify for deferment or forbearance, you won’t have as much unsubsidized debt for interest to gain on.
Subsidized Loans vs. Unsubsidized Loans
The savings on a direct subsidized loan is clear. Over the course of a 4-year degree program, you will be saving potentially thousands of dollars in interest, that the government will pay for you. You’ll want to save as much money as you can while going through your higher education. This way you can enter the workforce in good financial standing. And once you solidify your career path, you’ll have a smooth transition into paying off student debt.
If you can get a direct subsidized loan, you’ll most likely be better off. You must remember that you need to qualify for a direct subsidized student loan based on you or your parent’s financial status. Many people don’t qualify for this type of student loan and thus must choose another loan option. That’s why direct unsubsidized loans or private loans are available.
Private Student Loans
Private student loans are a little riskier than federal student loans for a couple of different reasons. Private student loans can be issued by banks or financial institutions. Banks will loan you just about any amount of money and the interest rate of their choice. The reason why private student loans are riskier is that like a car loan or house loan, the bank can garnish your wages and income to get their money back. So if you for some reason stop paying your loan payments they can take everything from you. That’s why banks love student loans.
Yet, sometimes private student loans can be a good thing. Like in the case of going to medical school to become a doctor. You might need a $200,000 loan that you can’t get anywhere else. And as a doctor, you should be able to repay that loan without too much trouble. You must understand the terms of your private student loan. Understand the positives and negatives and then decide if a private loan is the right choice for you.
Let’s look at how private student loans work to give you a better idea of why they aren’t the best loans.
How Private Student Loans Work
Private student loans are like car loans or house loans because they have collateral required. What that means is that you must have income or some assets to leverage for the loan so that the bank can get their money from you no matter what. What most students don’t realize is that a private student loan can use your future income as collateral for the loan. That means they can take your income if they need to.
When you take a private loan from the bank you’re telling them that if they don’t pay it back, they can garnish your wages to get their money back. That’s why we said this type of loan is a bit risky.
Unlike federal student loans, many private student loans need the student to have a cosigner. When you add a cosigner to a loan (usually a parent or family member) the cosigner becomes responsible for the loan repayment too. That means if you don’t pay the loan the bank can garnish your cosigners wages as well.
Additionally, many private student loans have something called variable interest rates. That means that you can get qualified for a loan at a certain interest rate and the bank can change that interest rate on you anytime. You might start off with an interest rate of 6% and one year later your interest rate could jump up to 10% or more. It’s really up to the bank to make that decision. Now, almost all federal student loans have fixed interest rates, so you always know what you are going to pay.
Private student loans are riskier than federal student loans. The bank can garnish your wages or increase their interest rates at any time. Otherwise, it might not be a bad option to consider if you are confident in your ability to repay the loan.
Private Student Loans vs. Federal Student Loans
When comparing private student loans to federal student loans there are a couple of things to understand. Below are some examples of the interest rate differences and debt forgiveness programs.
The average federal direct student loan for the year 2018 included an interest rate of around 4.45%. Some of the lowest rates that we could find for private student loans were around 5.99% which is a pretty decent increase. In most cases, the private student loan will have a higher interest rate so that’s to be expected.
Here are some things you may no know when it comes to student loan forgiveness and student loan deferment options. Many student loan forgiveness programs and deferment options are only available for federal student loans. There are very few forgiveness options for private student loans.
To make a long story short, you have fewer options for repayment and debt forgiveness when you get a private loan.
Consider This For Private Student Loans
Ideally, you wouldn’t need to get a private student loan but in some cases, it would be a good idea. Like we mentioned above, for medical school or the likes. You might want to look for alternatives to keep your school costs lower. Consider financial aid or even finding a cheaper higher education option. Look for a cheaper university or a trade school or certificate program. These days many people are taking boot camps that have very promising prospects for jobs as well.
If you do choose to take out a private loan for schooling check out our list of the best private student loans to help you pay for school!