Student Loans 101

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Updated on Wednesday, November 11, 2015

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When it comes to student loans, the information available can be daunting, and it might be difficult to decide where to start. We’ll walk you through three common questions so you can get educated before accepting loans.

Question 1: What is a student loan?

Simply stated, a student loan is a loan designed to help you pay for all things related to your college expenses, which includes tuition, books and housing expenses. With any type of student loan you will be required to both pay interest on the money you borrow and meet certain standards in order to be and stay eligible for the loan. For example, you’ll need to be enrolled at least part-time as a student or else repayment may begin. Finding a loan that works for your future lifestyle — projected income and time required to repay the loan — will be key factors that go into your decision of which one to pick.

Question 2: What are the different types of loans available to me?

In general, there are two different types of student loans: federal (those funded by the federal government) and private (those made by individual lenders like banks, credit unions or even schools themselves). There are some big differences when it comes to how these two types of loans are handled, which is why it’s usually best to maximize federal student loans first. Some of those differences include:

1. Repayment Structures

For Federal Offers, the following are available:

  • Income-driven repayment plans: These plans help ensure your monthly payments do not exceed a certain percentage of your discretionary income, which makes your payments more affordable. Remaining balances will be forgiven after 20 to 25 years of payments.
  • Forgiveness: The government offers a variety of forgiveness programs that will allow you to discharge your remaining debt after meeting certain requirements.

[How to Set Up Income-Driven Repayment Plans]

For Private Offers:

  • These types of loans typically require you to start making your payments immediately, and there are usually no income-driven repayment options and no forgiveness options.

2. Protections

Federal student loans provide more protections and are more forgiving if you fall on hard times. Some of those protections include:

  • Forbearance or deferment: These options allow you to stop making payments for a set period of time due to hardship. In forbearance, interest still accrues, but deferment is interest free.
  • Grace period: Usually a six-month window in which you don’t have to make a loan payment after you’ve graduated or dropped below part-time student status.
  • Loans forgiven in death: Almost all federal student loans are forgiven in the case of death.

[The Consequences of Refinancing Federal Student Loans]

Private loans may offer a grace period like federal student loans, but there are no forgiveness programs nor income-driven repayment plans. You may also have a co-signer on a private loan, which means if you fail to pay it, your co-signer will be obligated to handle the payments, often even in the case of death. If you already have a private student loan, and you’re interested in learning more about what happens when you have trouble making payments, this piece about settling private student loan debt might help.

Question 3: How can I refinance my loan?

If you’re already making payments on a student loan, and want lower monthly payments, then you may want to consider refinancing. You can check directly with your lender for any options it offers in terms of refinancing, but better offers tend to come from working with a new lender. (You can find a list of qualified options here.) Refinancing is often ideal for lowering interest rates on private loans, but think twice before you refinance a federal loan. Refinancing a federal loan means giving up options like income-driven payment plans or student loan forgiveness.

If finding the right student loan for your needs seems impossible, remember that you’re not alone. Ask around for about which loans have worked for friends and family in the past, and don’t be afraid to ask as many questions as you need to feel comfortable before signing on the dotted line.

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