Types of student loans and how they differentiate from one another
Student loans are necessary for most students, and they come in many different forms. They’re also one of the most complicated things you’ll ever deal with as a student. Why? Because there are many student loans out there, yet different from one another in some fundamental way.
The most significant difference between student loan types is how you repay them. Some loans have fixed interest rates, while others accrue interest as the loan is being paid off. Others will not require you to begin paying until after graduation, and several repayment options are available based on your income level and time spent using your degree.
This article is meant to enlighten you on the various types of student loans to choose the right one for your needs and ensure that your money is being spent wisely.
Federal student loans
The most popular loan amongst students is the federal loan. They are available to students with poor credit history and can be used to pay for college, trade school, or any other post-secondary education program. You don’t need a co-signer or collateral to get them, either; as long as you meet income requirements and aren’t defaulting on another federal loan, you could qualify for one.
Federal student loans also offer flexibility that even the best private student loan does not. Whether you go into deferment or forbearance depends mainly on your lender’s policies—but if you want to extend the length of your repayment term without increasing monthly payments (or vice versa), there’s a process for doing so with government-backed loans.
Private student loans
Banks and other private lenders typically make private student loans. The government does not guarantee or subsidize these loans, so you should expect to be charged a higher interest rate than federal student loans. The best private student loans are also not based on need; they’re available to students regardless of their financial situation.
The best private student loans usually have variable interest rates and repayment terms that can change each month, so it’s essential to understand how these elements could affect your payments when choosing which to take out. In addition, borrowers of the best private student loans may be required to make payments while still in school (though this is uncommon).
Private college loans
The government does not guarantee these types of loans. Because the federal government does not back them, the best private college loans have higher interest rates than other student loans, making them prohibitively expensive for some students. However, the best private college loans may be more advantageous to others because they provide more options regarding who can take out a loan.
Unlike federal aid programs like Stafford Loans or Perkins Loans (which have strict restrictions), the best private college loan lenders will lend to any applicant regardless of income level or credit history. Because this financial freedom is so attractive, private lenders often bring down their interest rates considerably to compete for business; today’s average interest rate on a private loan hovers around 5% compared with 7-9% for federal loans.
Refinance student loans
One of the most effective ways to pay off your debt is to refinance student loans, but it can also be an expensive and time-consuming process. If you’re looking to refinance student loans, keep in mind that a few different types of refinancing are available. For example, you may be able to refinance student loans with a private lender or with a federal loan consolidation program (such as Income-Driven Repayment). However, private lenders usually don’t offer any incentive programs like those offered by federal loan consolidation programs. Instead, they will base their interest rates on creditworthiness and employment history rather than on income level or family size like many federal loan consolidation programs do.
Can I refinance student loans with bad credit?
If you have a less-than-perfect credit score but still want access to low-interest rates for investing purposes (or other reasons), refinancing might be right for you! You can get much lower rates when refinancing because lenders know there is risk involved if they lend money when someone doesn’t have a good credit history. Get to know our terms in student loan refinancing.
Which student loan is best for you?
Now that you understand the basics of student loan types, it’s time to understand your financial situation better. If you’re unsure which type of loan is right for your case, talk to an expert or search online for information on different types of loans. Remember that many options are available today and that every person will have their own unique experiences with them. Take some time to find what works best for you!
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