How Do Student Loans Work?

If you have any aspirations of getting a higher education, the tuition fees can play the role of a roadblock in your path. Unfortunately, there’s not much that some students can do out of pocket since most parents simply can’t afford it.

Some students manage to make it work with the assistance of scholarships and bursaries, but not everyone has access to these. Fortunately, all hope isn’t lost because student loans provide opportunities for many people to get the education that they need to enter the career path that they desire.

Though it may not have been such a staple requirement in the past, there are many jobs that seem to be unattainable without higher education. The idea of incurring a loan expense during your college life can sound like a deterrent, but it doesn’t need to be a disaster if you manage your loan right.

What Is a Student Loan?

A student loan refers to any funding you receive for your education via a lending agreement. You usually receive the funds as you enter a school year, and you are required to start repayment upon the completion of your degree. While there are some cases where loans don’t need to be repaid with interest or at all, the normal occurrence is that you are required to repay the loan in increments with added interest.

When you are starting a college, there are usually scholarship, grant, and loan options listed as financial aid. Of course, the smart thing to do is to look to the grants and scholarships first. Even if they don’t cover the entirety of your tuition, they can cover enough of it to make any loan you have to take significantly less.

Many people would like to imply that student loans fall under the category of “bad debt” because of the millions of Americans that now have student loan debts paying off. This is one of those things that you need to view on a case by case basis. It is possible for the debt to get out of control. However, if managed well based on your situation, it can be a “good debt.”

Remember, you didn’t borrow money to splurge on something unnecessary. This is funding for an education. This education may be the reason that you manage to become eligible to take up a position in your field of interest. It is an investment in yourself and your future.

How Much Are You Allowed to Borrow?

This is one of the most common questions about student loans. No one wants to try to take out a student loan only to hear that it’s not enough to cover the cost of their tuition. You can rest assured that this isn’t the case. Student loans were made to be comprehensive enough to cover the tuition for just about any program.

The idea is that whatever program you choose should be coverable by a loan. Of course, if you manage to find other sources of funding that cut the amount of money you’d need to borrow, you can apply for a smaller loan, which means you have less to repay when you’re course of study has ended.

Remember that the important thing is to borrow only what is needed. Unnecessary borrowing just increases your debt for no good reason.

Types of Loans

Of course, the powers that be don’t automatically know that you need a loan and hand it to you. You must apply for a loan to be considered. Student loans can be considered as either federal or private. It is a wise idea to consider federal funding before you look to private lenders. There are typically better interest rates and terms since federal loans don’t simply exist to fund a business.

Federal Loans

Federal loans are those which are offered through the US government. This comes from the country’s budget for education. The point of these loans is to provide an attractive source of funding for borrowers that also benefits the country. The government doesn’t need to charge an arm and a leg in interest for there to be some benefit to the country.

There are unsubsidized and subsidized loans that fall under the federal umbrella. This sweetens the pot even more, as qualifying for a subsidized loan can take quite a bit of stress off you. An unsubsidized student loan works like any other loan type that you can imagine. You borrow an amount that starts to accrue interest immediately. This interest increases your balance at intervals, and eventually, you pay everything off.

Subsidized loans provide some breathing room for students. During the tenure of your degree program, the government takes care of all interest charges. Both loan types offer a six-month grace period during which you don’t need to make any payments after you graduate. Unsubsidized loans accrue interest during the grace period, while subsidized loans don’t. Note that subsidized loans are not offered to graduate students.

Private Loans

Private loans are those that are offered by lenders that are not associated with the government. If a family member offered you a loan to pay for your education, it would be counted as a private loan. The more likely scenario, however, is that you go through an institution, such as a credit union or bank.

Note that some of these loans require you to start the repayment process while you’re still attending school, so that can complicate things if you don’t have an income source while you’re working on your degree. Additionally, the interest rates tend to be higher than those you’d get with a federal loan.

The consensus is that you only go with a private loan if you can’t get a federal one. The only exception is if the private loan is offering you better terms. For example, a wealthy family member might give a loan to your immediate family for your education. That person may give you a year post-graduation to start your payments. This loan may also be interest-free. Those terms are better than even a subsidized federal loan, so this would be a more viable option.

How Are Funds Received?

The way you receive your funds depends on the avenue that you used when you were applying for the loan initially. If you got a federal loan, for example, the money doesn’t pass through your hands. Your application would have included various details such as the school and program of choice, which allows the funding to be sent directly to the financial aid arm of the institution. This is what is done with these loans.

Private loans can be handled in different ways, depending on the lending institution and the terms of the loan. A private loan can be given directly to the borrower, or it can also be sent to the financial aid office. If it is sent to the office, then the amount is applied to the student’s account. Any leftover funds after all payments are accounted for are given to the student as a refund.

When Are Loans Repaid?

Student loan repayment depends on the kind of loan you got and the conditions that came along with it. If you got a federal loan, then you are given six months after you graduate before payments are due to begin. That gives you some breathing room to get a job, plan your payments, and make changes to your plan based on your income and expenditure.

Private loans are likely not to provide any breathing room, but this heavily depends on the source of the loan. While there may be loans that have a grace period, there are others that may require you to start your payments as early as the month after you get the loan.

How Are Loans Repaid?

This is another question that doesn’t have a single answer. This depends on the lender and the terms that are associated with the loan.

A federal loan tends to provide you with flexible repayment options. This applies to both the payment method you use and the repayment specifics, such as your monthly payment and your term of payment. There are eight different payment plans that are available for federal loans. Standard and graduated repayment are the most common, but the others can be more favorable, depending on your situation. Note that every repayment type is not available to every borrower.

Private loan repayment is based on the agreement. The repayment specifics are typically discussed and laid out in the initial phase, so there isn’t a negotiation after that.

What’s the Penalty for Not Repaying?

The penalties that are synonymous with a lack of payment on loans can be different based on your loan type. A borrower is a payment delinquent if no payment is made by the time a due date arrives.

Though the payment may be late at that point, it can still be made to remove the delinquent status. There may be a small charge whenever payments are late.

Things begin to go downhill if you get to the default stage. You are considered in default whenever a loan payment is unreasonably late. If you were to be late on a payment by even a month, you wouldn’t be considered as anything more than a delinquent.

The default stage happens when you’re about a year late on a federal loan or about four months late on a private loan. When you get to this stage, the loan becomes a financial burden that can make your life a nightmare. Charges start getting thrown in, which means your payments are less effective.

If it’s a federal loan, it can start messing with other areas of your life. For example, the government can simply intercept your refunds and start seizing a percentage of your salary.

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