Graduating this year? The world of student loans can be overwhelming, especially for a 17 year old, but understanding the different types available can help you make informed decisions about financing your education. here’s a breakdown of the main types of student loans:

1. Federal Student Loans

Federal student loans are funded by the federal government, and typically offer more favorable terms and conditions (meaning less money paid in interest) compared to private loans. Here are the primary types:

Direct Subsidized Loans

These loans are available to undergraduate students with demonstrated financial need. The government covers the interest while you’re in school at least half-time, during the grace period (after you graduate college), and during deferment periods (where you choose to pay off the loan later due to struggles).

Direct Unsubsidized Loans

Available to undergraduate, graduate, and professional students, these loans do not require proof of financial need. Though, Interest accrues during all periods, including while you’re in school.

Direct Consolidation Loans

This option, usually not when you first enter college, allows you to combine multiple federal student loans into one loan, simplifying your monthly payments. The interest rate is a weighted average of the rates on the loans being consolidated, which essentially means its combining your loans into one debt with an average interest.

2. Private Student Loans

Private student loans are offered by private lenders such as banks, credit unions, and online lenders. Terms and interest rates vary based on the lender and the borrower’s creditworthiness (your credit score or ability to pay off debt timely). These loans can cover education costs not met by other forms of financial aid, but usually have higher interest rates than federal loans.

3. State Student Loans

Some states offer their own student loan programs with terms and conditions that may differ from federal and private loans. These loans are typically available to residents or students attending schools within the state. For example, Texas offers the Student Loan Program, which offers loans of up to $15,000 to full-time Texas residents who are U.S. citizens or permanent residents and who are attending Texas colleges or universities

4. Institutional Loans

Certain colleges and universities offer their own loan programs to students. These institutional loans often come with favorable terms compared to private loans and can be a good option for covering gaps in funding.

5. Health Professions Student Loans (HPSL)

These are low-interest loans specifically for students pursuing degrees in certain health-related fields, such as medicine, dentistry, or pharmacy. HPSLs often have more favorable terms for those entering these critical professions.

Key Parts of a Student Loan:

1. Principal

The principal is the original amount of money you borrow from the lender. It’s the base amount on which interest will be calculated.

2. Interest Rate

The interest rate is the percentage of the principal that the lender charges for borrowing the money, arguably the most important part in choosing your student loan. It can be fixed (remaining the same over the life of the loan) or variable (changing periodically based on market conditions). Fixed interest usually in your best interest as you know exactly how much you pay. Look for words like “APR."

3. Loan Term

The loan term is the length of time you have to repay the loan. It can range from a few years to several decades, depending on the type of loan and repayment plan. The shorter your term, the less interest you pay.

4. Grace Period

The grace period is the time after you graduate, leave school, or drop below half-time enrollment before you must start making loan payments. Federal loans typically offer a six-month grace period.

5. Repayment Plan

The repayment plan outlines how you will pay back the loan. Options include standard repayment (fixed monthly payments), graduated repayment (payments start low and increase every 2 years), income-driven repayment (payments depend on a percentage of your income), and extended repayment plans (extends your loan term up to 25 years), each with different terms and monthly payment amounts.

6. Deferment and Forbearance

Deferment and forbearance allow you to temporarily postpone or reduce your loan payments under certain conditions, such as economic hardship or returning to school. During deferment, interest may not accrue on certain types of federal loans.

7. Loan Fees

Loan fees are additional costs associated with taking out the loan. These can include origination fees (a percentage of the loan amount) and late fees for missed payments. Private lenders are usually very sly with these kinds of fees.

8. Cosigner

A cosigner is someone who agrees to repay the loan if you fail to do so. Having a cosigner can help you qualify for a loan or get a better interest rate, especially if you have limited credit history. Ask your parents to cosign if it means a more favorable interest rate.

9. Loan Servicer

The loan servicer is the company that manages your loan, including billing and other services. They are your main point of contact for questions about your loan and repayment.

10. Loan Forgiveness

Loan forgiveness programs allow for the cancellation of part or all of your loan balance under certain conditions, such as working in public service or teaching in a low-income area.

Conclusion:

We hope this informational post was beneficial for you to understand the different kinds of student loans, and the key terms you should look out for while taking out a student loan. If you want more information, ask an advisor or trusted adult to help step you through the process.