With the return of school, student loan basics remain a topic of discussion. Not everyone can pay tuition in cash, and most students will need financing for their college education. Currently, about 44 million borrowers owe a collective $1.7 trillion in federal student loan debt. Yet, even though it is such a common occurrence, many do not understand the terms of their agreements.
Recent quotes from the Department of Education aim to ensure that borrowers are not worse off financially due to the pandemic. As it stands, federal student loan borrowers have been under emergency relief forbearance for over two years due to COVID-19. The newly approved changes will provide thousands in student debt relief, especially after decades of debate over lending practices. It was one event after another, and now it’s time for adjustments.
While many changes will occur this year, a few things remain constant. Below are some straightforward tips regarding student loans. Additionally, before making any significant financial decision, it is best to speak to a certified financial counselor.
Federal vs. private student loans
There are two main types of student loans, federal and private. With Federal student loans, the interest rates are variable and determined by congress. However, federal student loans offer income protections, such as income-based repayment and forgiveness options.
Private student loans, on the other hand, do not offer the same benefits. If a borrower chooses this loan type, it’s mainly for rate consistency. Anyone interested in opening a student loan must decide what works best for their situation.
For both loan types, you can refinance, but your loan will be considered private once you sign the agreement.
Private student loan rates vary
Let’s say you decide to open a private student loan. Keep in mind that the rate variance can be between 2-5% depending on your choice of lender. Typically, you’ll get higher rates with large-scale student loan servicers or big banks. If you want a more affordable interest term, stick to your local credit union. Since members are shareholders, they receive the profits. The credit union structure enables these institutions to offer better terms on loans and higher yields on savings products. See for yourself by visiting our rates page here.
Consider your income upon graduation
Student borrowers need to account for their expected income once they graduate. Although the figure is not guaranteed, it is a good starting point for preparing a budget. First, determine how much your monthly tuition will cost using a student loan calculator. Then, ask yourself, how will my expenses change after I graduate? Will you move away from home? Will you start working right away? Every factor will affect your future income and payments.
You can pay towards your student loan at any time
If you have extra money, it makes sense to put it towards your loan. Generally speaking, there are no prepayment penalties, but ask your lender if you are unsure. Paying off your student loan early will lower the lifetime balance since you’re not accruing the interest.
Going to college is a huge lifestyle change. By understanding the student loan basics, you can make paying for it much easier.
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