Private Student Loans as a Tool to Pay for College
With the rising cost of a higher education, more and more students are taking out loans each year to help finance it. In fact, 7 out of 10 students who graduated in 2015 had student debt—with the average amount being just under $30,000.
While there are other ways to help pay for education, such as scholarships and grants, these are almost never nearly enough to cover the huge price tag of a college degree. Though it isn’t necessary to attend college to be successful, many jobs that are attractive to young adults require a college degree.
Though many people see student loans as negative, when it comes down to it, they are truly an investment in your future. Having a college degree opens up countless doors that would otherwise be locked to those who only a high school diploma. Many jobs won’t even look at the applications of those without one—no matter how intelligent they may be.
If students are smart about their debt and take their education seriously, they don’t have to be the lifelong burden that so many people try to make them out to be. However, because these loans are a risk, those entering into college should strongly consider there future career options and what major is necessary to obtain that career.
Under most circumstances, you will have to pay back all of your student loans. It is crucial to have a plan on what you will do after college and how you will pay pack your student loans. Thinking about all of this before you even step foot in your freshman dorm will give you a leg up on other borrowers and will put you on track for a (relatively) stress-free repayment process.
It is easy to get caught up in the seemingly countless number of options when it comes to the best places for student loans. Though this guide will mainly focus on private student loans, we will first go over how they are different from federal student loans and the basics of each.
Federal Student Loans vs. Private Student Loans
There are two types of educational loans—federal and private. Each of these have their own perks and downfalls but both can help students and their families pay for their higher education. It is important to understand both before determining which is best for you. Though the government is typically considered the best place for student loans, private lenders do have some benefits as well.
The following video gives a quick overview of the steps you should take when paying for college.
Federal student loans are given by the Department of Education, which as mentioned, is typically considered the best place for student loans. These usually are the student loans with the lowest interest rates. In order to receive these loans, students and their parents must fill out the Free Application for Federal Student Aid, or the FAFSA. This form takes in basic information about the financial situation of families, such as income. Based off of this, the government determines the Expected Family Contribution, or EFC for short.
After the EFC is calculated, the government may offer students grants, scholarships, and/or loans. The lower the EFC, the more likely students are to receive need-based help in the form of scholarships and grants. Everyone who fills out the FAFSA will be offered some type of federal educational loan.
There are two main categories of federal student loans—subsidized and unsubsidized. Students with a low EFC are typically offered subsidized loans. For these, the government pays the accrued interest while the student is in school. This means that the principal will stay the same as long as the borrower is enrolled. The government does not pay the interest on unsubsidized loans, leaving students and their families responsible for paying it. These are typically reserved for families who can afford to contribute more towards tuition payments.
As of June of 2016, most federal student loans have an interest rate of 3.76% for undergraduates. These are low interest student loans that private lenders typically can’t compete with. This rate is typically lower than what is offered by private lenders. Usually families only turn to private student loans after they have exhausted all of their federal options.
Banks, credit unions, and private lenders all may offer private student loans. The main difference of private student loans is that they are, in most cases, based solely on the credit of the borrower and, if applicable, his or her cosigner. Private lenders perform a credit check to determine if customers are eligible for loans and, if they are, what they’re interest rate is.
So now you know the federal government is, in most cases, the best place for student loans first. After you use all federal student loans, you can then turn to private student loans.
Click Here to visit SLR.net for more information.