Most college students require financial assistance to complete their undergraduate and post-graduate degrees. Even with GI Bill benefits, scholarships and grants, you may require a student loan.
In 2022, 43.5 million people had federal student loans totaling $1.635 trillion, according to the National Student Loan Data System (NSLDS). Many people have questions about the different types of student loans, repayment and refinancing. Here are some of the common questions and their answers.
What’s the Difference Between Private and Federal Student Loans?
Federal student loans are backed by the federal government, don’t require a credit check, and are based on information you submit in the Free Application for Federal Student Aid (FAFSA). They tend to have lower fixed-interest rates and more repayment options. Federal loans limit the amount you can borrow, meaning they may not cover the full cost of your education.
Private student loans, from banks, credit unions or online lenders, require a credit check and may be cosigned by a parent.
Like federal student loans, private student loans can be used for a variety of education-related expenses, such as tuition, dorm room or off-campus housing, textbooks and supplies, laptops, transportation and other costs certified by your school.
How Do I Handle Student Loan Repayment?
- Know who you owe and how much. It’s a simple step, but it’s important to know how much money you owe, to whom you owe it, when to pay and how to pay it. You can then analyze your income and expenses to determine whether your student loan payment is manageable.
- Set up automatic payments. Having your payments deducted automatically from your bank account saves time and prevents missed payments. Private lenders may even give you a discount on your interest rate for setting up automatic payments.
- Consider repaying while in school. Most students defer their loan payments until after they’ve graduated and have a job. But, if you can manage it, paying while in school can help you begin or continue to build your credit history, and will reduce the overall cost of the loan. “We offer borrowers the option to make a low monthly payment of $25 while they’re in school, no matter how many student loans they’ve taken out,” added Currie. “This creates good money habits early and allows you to have less to pay back upon graduation.”
- Would deferment, forbearance or refinancing be a good option? An affordable payment is great, but what about all that interest? If you can make additional payments (without a prepayment penalty) or increase your monthly payment to minimize the interest you pay over the life of the loan, you’ll have more money later. You may also want to consider consolidating and refinancing your student loans.
Should You Refinance Your Student Loans?
Just like refinancing a house, you need to ensure that refinancing your student loan is good for you in the long run. Through a private lender, student loan refinancing could be a great idea if you have multiple loans, a strong credit history and a steady income. For instance, refinancing can be beneficial if your credit score is strong enough to qualify for a lower interest rate than your current one or you want to reduce the number of monthly payments you make. When you refinance, all of your loans combine into one loan with a new interest rate, new term length and one single monthly payment. Some private lenders allow you to refinance your federal and private loans together.
The idea is to lower your monthly payment, interest rate and save money in the long run.
What Other Options Do You Have With Student Loans?
The most common option is payment deferment, which usually means you don’t start paying on the loan until after you graduate from school. Interest still accrues on the loan, so you may want to make interest-only payments during that time.
Another option is consolidation, which the U.S. Department of Education offers to allow you to combine all your federal student loans into one new federal loan with a fixed interest rate and a new term. The interest rate for this loan will be a weighted average of your previous individual loans’ rates.
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