Finances

What is a student loan, and how does it work?

Student loans can be a little confusing to understand at first. But once you know the basics, they're not so bad! In this blog post, we'll break down what student loans are, how they work and why they might be a good option for you.

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What you should know before applying for one!

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Learn everything about student loans and achieve your professional goals! Source: Adobe Stock.

When you’re young and just starting, the possibilities seem endless. But, if you intend to go to college, you better learn what a student loan is.

You can be anything you want to be, do anything you want to do. And one of the goals many young people have is to get a good education. 

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But getting a good education doesn’t come cheap – tuition rates are constantly increasing, and it’s becoming more and more difficult for students to afford school without financial assistance.

That’s where student loans come in – they help bridge the gap between what students can afford and the cost of tuition. 

But what are student loans? And what should you know before taking on student loan debt? Keep reading to find out!

What is a student loan, and what are the different types available

A student loan is a type of loan designed to help students pay for their education. The funds from a student loan cover tuition, books, and other expenses related to school. 

Student loans typically have lower interest rates than other types of loans, and they may offer deferment or forbearance options for borrowers struggling to make payments. 

There are two main types of student loans: federal and private student loans. 

Federal Student Loans

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Federal Loans should be your first option. Source: Adobe Stock.

A federal student loan is a loan that the US federal government provides to help students pay for their post-secondary education. They typically have lower interest rates than private loans, and they offer repayment options that can make it easier for borrowers to manage their debt. 

The four types of Federal Student Loans

There is more than one kind of federal loan. Let’s find out which one is right for your situation.

Direct Subsidized Loans

These are need-based loans, meaning that the student must demonstrate financial need to qualify. The government will pay the interest on these loans while the student is in school and during any deferment periods. 

Direct Unsubsidized Loans

This loan doesn’t require proof of financial need, and the student is responsible for all interest on the loan.

Direct PLUS loans

Available to graduate and professional students and parents of dependent undergraduate students. These loans have a fixed interest rate and can be used to cover the cost of tuition and other expenses. 

Parent PLUS loans

These loans also have a fixed interest rate, but they are only available to parents of dependent undergraduate students. 

Private Student Loans

Banks and other financial institutions issue private student loans rather than the government. 

Private loans usually require a co-signer and may have higher interest rates than federal student loans. However, private loans can sometimes offer more flexible repayment options than federal loans. 

What is an Interest Rate on a Student Loan?

An interest rate is the percentage of your loan you will pay back in addition to the principal (the original amount borrowed).

For example, if you take out a $10,000 loan with a 5% interest rate, your total repayment amount will be $10,500 ($10,000 + $500 in interest).

Interest rates can be either fixed or variable. A fixed interest rate means that the rate will never change for the life of your loan. Depending on market conditions, a variable interest rate can go up or down over time.

The vast majority of student loans in the United States are federally-backed loans with fixed interest rates. Federal student loan rates are set by Congress and usually change yearly. 

Currently, federal student loan rates for undergraduates are between 4.45% and 7%, depending on the type of loan. Graduate students typically pay a higher rate, between 6% and 8%.

Your interest rate will likely be variable if you have a private student loan from a bank or other lender.

Private student loan rates are set by each individual lender and can vary widely from one lender to another. It’s important to compare rates from multiple lenders before taking out a private student loan.

Student loans in America usually come with a “grace period” – meaning you don’t have to start making payments until after you graduate (or drop below half-time enrollment).

For federal loans, that grace period is typically six months long. Private loans vary by lender but are often shorter (sometimes as short as 30 days after leaving school). 

If you don’t make payments during your grace period, your entire unpaid balance will begin accruing interest at that point. 

What are the repayment options for student loans?

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Graduation can give you better opportunities in your life. Source: Adobe Stock.

There are several different ways that you can repay your student loans. The most common option is to make monthly payments directly to the lender. 

You can also choose to consolidate your loans, combining all of your loans into one single loan with one monthly payment. 

There are also repayment plans available that income-based, which base your monthly payment on your income and family size.

You can usually qualify for an income-based repayment plan if you have a low income or are experiencing financial hardship.

What happens if I can’t repay my student loan

If you take out a student loan, you will be responsible for repaying the borrowed amount, plus interest and any applicable fees.

 If you are unable to repay your student loan, there are a few things that could happen. One option is to defer your payments, which means you would put off making any payments until later.

Another option is to enter into forbearance. This would allow you to make reduced payments or stop making payments altogether temporarily. 

However, both of these options typically have consequences, such as an increase in the total amount owed or damage to your credit score.

In some cases, it may even be possible to have your student loan discharged through bankruptcy.

And it’s not just students that can do that. Even some celebrities have filed for bankruptcy to get out of debt. Wanna know more? Read this next article on Celebrities who went bankrupt to find out who they are!

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About the author  /  Vinicius Barbosa

Vinicius Barbosa is a writer of finance-related content on this portal. Graduated in Social Communication, he writes about everything that involves the world of finances, from credit card recommendations to investment tips, for readers who want to make better decisions when it comes time to spend their money or invest wisely.

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