Congratulations! You’ve just been accepted to your dream school. After all the excitement has subsided, you’re left with one big task: How will you pay for it?
Federal Vs Private
When deciding the type of student loan you want to take on, there’s different options to choose from. Keep in mind, the advantage of college loans over other kinds of debt is that interest rates tend to be relatively low and the interest may be deductible. The most popular options include:
Direct Subsidized Loan: This federal loan is eligible to undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school.
Direct Unsubsidized Loan: This federal loan is eligible to all undergraduate students, regardless of financial need. The student is responsible for paying interest during all periods. The annual limit is up to$20,500 (less any subsidized amounts received for same period) depending on grade level and dependency status.
Direct PLUS Loan: This federal loan is eligible to graduate & professional degree students, and parents of dependent undergraduate students. The annual limit is the cost of attendance (determined by the school) minus any other financial aid the student receives.
Private Education Loan: This private loan can be issued to either undergraduate or graduate students. The annual limit is the cost of attendance.
As a rule of thumb, it usually makes sense to exhaust your federal options prior to looking to a private loan.
Refinancing Student Loans
If you were issued a loan at an unfavorable high rate, it may make sense to explore refinancing. Refinancing means that you are revising and replacing the terms of an existing loan, usually to get a more favorable interest rate and lower monthly payment.
Refinancing your student loans does not always make sense. When you refinance a federal loan, it becomes a private loan, thus waiving the benefits that comes with a federal loan. Also, if you are looking to greatly reduce your monthly payment, you often must increase the term of your loan.
To decide if a refinance would make sense for you, it’s important to look at multiple lenders and think about your primary objective.
Repayment Options: One of the main benefits of federal student loans is that the government offers several repayment options:
Standard Repayment Plan: With this original repayment plan, you pay a fixed amount each month over a 10-year term.
Graduated Repayment Plan: The repayment term is still 10 years, but payments start out lower in the early years of the loan and then increase gradually, usually every two years. This plan is for borrowers with relatively low current incomes who expect their incomes to increase in the future.
Extended Repayment Plan: You extend the time you have to repay your loan, up to 25 years. Your fixed monthly payment is lower than it would be under the standard plan, but you'll ultimately pay more for your loan because of the additional interest that will accumulate over the longer repayment period. This plan may be combined with a graduated plan.
Income-Based Repayment (IBR) Plan: This option is available only to Direct Loan and Grad PLUS Loan borrowers (not Parent PLUS Loan borrowers). Your monthly loan payment is based on your annual discretionary income, and you must have a partial financial hardship to qualify.
To learn more about federal loan repayment options and student loans in general, visit studentaid.gov.
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