"Student loans." These words are usually said with a sigh and accompanied by stress and anxiety.
What type of loan should I take out?
How will I pay this off as a young educator?
Where do I start?
It seems overwhelming right now, but it doesn’t have to be. Between choosing a college and preparing for your education, you have enough on your plate already. To save you a substantial headache, we’ve put together a crash course in student loans. Understanding the features of each type of loan will make it easier when the time comes for you to take out a loan.
Plenty of options
Generally speaking, there are two types of loans: federal and private. Federal loans typically have more flexible payment plans and lower interest rates. Young educators often benefit the most by maxing out federal loans and only using private loans to close the gap between what has been borrowed and what is still needed. Let’s take a closer look at each one.
There are three different types of federal loans: Stafford (or Direct) loans, Parent PLUS loans and Perkins loans. Federal loans have a few things in common: They’re more flexible than private loans because there are more options for repayment and forgiveness, and they include fixed interest rates and grace periods. Repayment for most federal loans doesn’t start until 6 months after graduation. This is called a “grace period”.
1) Stafford (Direct) loans
Stafford loans can be either subsidized or unsubsidized, which is just a fancy way of saying that interest can start accruing before or after graduation. Simply put, a subsidized loan doesn't start charging you for borrowing money until after you leave school. An unsubsidized loan starts charging interest from the time the loan is taken. Generally speaking, interest rates are low on Stafford loans, and repayment options are much more flexible than private loans. This is the most common type of federal student loan today.
2) Parent PLUS loans
Parent PLUS loans are available for parents of undergraduate students who are enrolled at least half-time at an approved educational institution. The maximum amount that can be borrowed is set by the school's financial aid office and will depend on the cost of the student's attendance and any other financial aid the student is receiving. One thing to remember when looking into Parent PLUS loans is that there is no grace period, so repayment will start sooner than other loan types.
3) Perkins loans
In a Perkins loan, your school is the lender. The interest rate for Perkins loans is low, and they’re available for both graduate and undergraduate students. If you're uncertain about your ability to start paying back your loan after graduation, this loan gives you a 9-month grace period before you have to start repayment.
A word to the wary: If you'll need flexible repayment plans or possible forgiveness, private loans won't be the best choice. Unlike federal loans, forgiveness programs for private loans are limited or nonexistent.
Private loans are borrowed from banks or credit unions. Because each lender will have unique interest rates and repayment stipulations, the specifics about private loans will vary depending on the lender and borrower. However, understanding a few basic characteristics of private loans will help determine if they’re right for you.
The first notable difference of private loans is that they may require payments while you are still in school. Also, the terms of private loans vary by lender, which means that interest rates can be fixed or variable. If variable, your interest rates could increase while you’re still repaying. You also might need to have established credit to take out some private loans, which could be a challenge for a young aspiring educator. Even if you qualify for the loan without needing a cosigner, you may qualify for a better interest rate by having someone cosign.
So when might a private loan be a wise choice? If you have already borrowed the maximum amount in federal loans but still need more to cover the costs of school, a private loan can be used to bridge the gap and get you the money you need to earn your degree. An added benefit is that private loans offer flexible duration selections, meaning you can choose different payment durations, such as five, 10, 15 or 20 years, to repay.
There’s always help
Navigating the loan landscape for first-time borrowers can be overwhelming at first, but the more you know about the different kinds of loans, the more prepared you are to borrow responsibly and set up a prudent payment plan.
It’s important to make the right decisions for your future. Be sure to talk to someone about the right loans for you. To find out more about the right loans for you, head to studentloans.gov.
AM-C04286 (Mar. 18)