Many college students will end up borrowing one or more student loans before the end of their education. This is because the number of government grants aren’t enough to cater for all college expenses.
Currently, each year, there are over $100 billion worth of new student loans. Also, there are more than $1 trillion outstanding student loan debt.
Due to the fact many student loan debt cannot be avoided, it is crucial for college student to have a clear picture of how student loans works and what is involved.
What’s A Student Loan?
In its simplest form, a loan is a borrowed money that is paid back over an agreed period of time. Aside, paying back the actual amount of money borrowed, many borrowers are required to pay a fee known as interest.
A student loan is a loan obtained by a student in order to cover up for college costs.
What’s An Interest On A Loan?
An interest is the amount of money that you’re charged for using someone else’s money and in this case a loan. Interests are often requested for once in a month depending on the balance of the unpaid loan.
Interest isn’t a one-time fee, as many students wrongly assume. Interest rates are often indicated in the percentage of your loan’s balance.
Many of the new student loans come with a fixed interest rate. This means the interest rates will remain the same throughout the life time of the loan.
But if your loan has a variable interest rate, it means it will change every year, quarter or every month.
What Are The Sources of Student Loans?
Student loans are made available from several different sources. Many new student loans as well as parent loans are from the federal government. These loans are made available via the U.S. Department of Education’s Federal Direct Loan program.
Also, the source of other student and parent loans are from private lenders like banks, colleges and state governments as well as other financial institutions.
Typically, it is better for students to obtain a federal loan first. This is because federal student loans are more affordable, more available and they come with an easier repayment terms.
Learn more about why you should choose a federal student loan here.
How Much Are You Allowed To Borrow?
A loan limit indicates the highest amount of money you can borrow. Some available student loans can offer you up to the entire cost of college, lowered by the amount of other students’ financial aim.
Some other student loans come with lower fixed annual and cumulative loan limits.
However, you shouldn’t shy away from student loans because they are considered a good debt – an investment you’re making into your future. However, too much of it can hurt you in the future.
The way out is to borrow the least you need and not as much as you can.
How Can You Apply For A Student Loan?
If you intend to apply for a federal student loan, you can do so by filing the FAFSA (Free Application for Federal Student Aid). You will get the loan via the college’s financial aid office.
But if you intend to apply for a private student loan, you should go ahead and contact the lender.
Qualifying for many private student loan depends on the borrower’s credit. But many students lack good credit history or long enough credit history.
As such, they are often required to apply for a private student loan with a credit worthy cosigner.
The cosigner automatically assumes the responsibility of a co-borrower. This means he or she is also responsible for paying back the debt.
Learn about how to get a private student loan even with a bad credit here.
Once the loan is endorsed, the borrower is required to sign a promissory note which indicates the terms and conditions of the loan. This include the repayment options and the interest rates.
If it’s a federal student loan, you’ll get a Master Promissory Note (MPN) which can last for a period of ten years of non-stop enrollment at one college or university.
How Will You Get Your Student Loan Money?
If you apply for a federal student loan, the money will be sent to your college financial aid office. But if you apply for a private student loan, the money will be sent to you or your college financial aid office.
If the loan money are received by your college’s financial aid office, they will be used for the college’s charges for necessary fees such as tuition, room and board (if applicable) and other fees.
Whatever amount is left is sent to the student to cover for the cost of books, supplies and other college-related expenses.
What’s The Process of Repaying Student Loans?
Once the student graduates or perhaps drops below half-time enrollment, the student is expected to start paying back his or her student loans.
However, many student loans provides a grace period, often six months before paying back begins.
For a federal student loan, repayment takes a 10-year repayment term with the same monthly loan payments.
Also, federal loans provides extended paying back terms as well as income dependent repayment and this base the monthly payment on the student’s discretionary income.
These repayment programs are designed to lower the monthly payment by raising the term of the loan.
As such, the lender will send the student a coupon book prior to the period of paying back. The student is expected to send in payment for each month along with the appropriate coupon.
Rather than send a coupon book, some lenders send borrowers’ statement. To make payment easier and to be done at the right time, the borrower can sign up for auto-debit.
In this case, the monthly loan payment is automatically sent from the borrowers account to the lender.
n this case, the monthly loan payment is automatically sent from the borrowers account to the lender.
Some lenders offer borrowers a reduction in interest rate to motivate them to sign up for auto-debit as well as electronic billing.
What If You Refuse To Pay Back A Student Loan?
If for whatever reason a borrower does repay a loan at the deadline date, he or she is referred to as being delinquent. As a penalty for delinquency, late fees may be charged.
But if the borrower is very behind on a loan payment, for instance 120 days on private student loans and a period of 360 days on federal student loans, the borrower is said to be in default.
Several negative things happen when a borrower is in default. For instance, collection charges that is high up to 20% can be deducted from each payment after the borrower defaults on a federal student loan.
Even more, the federal government may confiscate up to 15% of the borrower’s wages and seize federal and state income tax refunds.