MoneyWisdom Blog

Understanding Different Types of Student Loans

Posted by Hanscom Federal Credit Union on May 3, 2017 1:24:29 PM

student getting student loan information

If you or a family member will be attending college soon, you’ve probably noticed that the sticker price for a college education has risen considerably in recent years. According to Sallie Mae’s study How America Pays for College 2016, families spent on average $23,688 for college in the 2015-16 academic year, and two in five of them borrowed at least some money to help pay the tab.

Though the costs can be steep, a college degree is a good investment in the student’s future. To get the best value from that investment, however, it’s prudent to make sure you get the right type of student loans for your individual situation.

Private Student Loans

For most people, federal student loans are a better deal than student loans from private entities like banks, colleges, and other lenders. This is because private student loans – though they can be used to pay for the same types of things as federal student loans – are structured much like other types of personal loans. Interest rates can be quite high – into the double digits — and they’re often variable, so there’s uncertainty about exactly how much you’ll owe. Also, repayment options are generally not flexible, and some may even require repayment to begin while the student is still in school.

Federal Student Loans

Federal student loans, which carry fixed interest rates, are generally available to all students – even those from affluent families – and most require no credit check and no cosigner. Though you accrue interest while in school, you generally won’t be required to begin repayment until you graduate. And, those with financial need may qualify for subsidized loans, which reduce their costs even more. After you graduate, if you experience financial hardship, you may be able to reduce or postpone your payments. In some cases, you can even have the debt forgiven through public service work.

So, given the many advantages of federal student loans, why would anybody take out private student loans?

Well, it’s those high costs mentioned above. While federal loans are a good deal, there are limits to how much a student can borrow, and that may not be enough to cover their college costs. However, though a college degree will usually pay off, it’s important for students to take a hard look at their earning potential after college when deciding how much to borrow. A smart rule of thumb is to borrow no more than what you expect to make in your first year of employment after graduation – this ensures a reasonable debt load that can probably be paid off within ten years or so.

And remember, neither federal nor private student loans are likely to be forgiven, even if you declare bankruptcy. So, even if you can borrow more, it’s wise to take on the minimum amount of debt you absolutely need.

Read the complete Sallie Mae study here.

Other blogs on this topic that our readers found interesting:

Paying for College Starts with the FAFSA

Should I send my teen to college with a credit card?

Will investing in a condo help cut college costs?

Save for Retirement While Paying for College

New College Student? 4 Ways to Ace Your Finances This Fall 

Topics: Student Loans

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