Taking out student loans is an important decision that can affect your career prospects for the rest of your life. It can also have a big effect on your financial future. This makes it critical to understand the type and terms of any student loan you take out.
There are two main types of student loans; those issued by the government and those issued by private lenders. Federal student loans are typically offered as part of the student aid packages sent out to prospective students from practically all universities and colleges. These loans are backed by the federal government. These loans come from several different government programs, but in general they have lower interest rates than private loans. There are no credit checks required in order to qualify, but some types of federal loans do require students and their families to meet certain income requirements.
Private loans, on the other hand, are offered by banks and other lenders to students after they receive their financial aid award statements. Requirements for these loans vary between lenders, and they are not subsidized by the federal government. Due to these factors, the interest rates on these loans are often higher than federal loans. Private lenders are often able to fill in the gaps that federal loans and aid leave behind, however.
When it comes time to pay back student loans, there are some differences and similarities between these loans. In general, it is recommended that students consolidate their loans after graduations. Essentially, this combines their student loans together into one loan with one set of terms and one monthly payment, making paying back the student loans easier.
Federal student loan consolidation is usually done through a program known as the Federal Family Education Loan Program or FFELP. Federal student loans such as Stafford, Perkins, and PLUS Loans are all eligible for this program. After federal student loan consolidation, the term of the loans is usually stretched out. Instead of having only ten years to pay back the loans, you can get up to thirty years to pay the loan off. In addition, your interest rate will usually be lower, and fixed at the same rate throughout the life of the loan. This means that your new payment amount will stay the same until the loan is paid off.
Private student loan consolidation, on the other hand, is not controlled by a single agency. This means that each lender will have its own rules regarding consolidation. Interest rates and loan terms will vary a lot between lenders, making it necessary to shop around in order to find the best deal. This also gives former students more flexibility, since they can choose from a variety of plans. Private lenders can offer loans with variable interest rates and payments, allowing students to pay very little on their loans while they are starting their careers and becoming established, then paying off more as they become more financially stable.
Be sure that you understand the difference between federal and private student loans before agreeing to take out money for your education. Remember that it is very difficult to discharge loans in bankruptcy, so be sure to only take out as much as you need.