Types of Student Loans: Understanding the Different Ways You Can Borrow Money to Help Pay for College

If you’re a first-time college or grad school attendee, or an adult who is returning to studies after working for a few years, are you aware of the different financial resources available to you? Most people have heard of private and federal lending opportunities but few are aware of the panorama of resources that exist. Here’s a look at the current lay of the land for people headed to college or grad school, and for working adults who are currently repaying their education debt.

Private Financing

One of the largest sources for students who need money for education comes from the private lending sector, as opposed to the federal government. These options are similar in many ways to mortgages in that terms depend on the borrower’s credit scores, the institution doing the lending, prevailing interest rates, and other factors. In the majority of cases, these kinds of agreements include a cosigner but there’s no requirement for one unless the lender demands it.

Refinancing of Education Debt

It’s possible to use a private lender in order to refinance your college debt. Refinancing can often help you get a more favorable interest rate because your credit scores are likely better as a working adult than they were when you applied for the funds. Additionally, a refi is a good way to extend the term of the agreement and thus have more time to pay. In many cases, that also means lower monthly payments and more breathing room in your personal budget.

Consolidations

Similar to a refinancing in some ways, a consolidation for education loans works much the same way as a standard debt consolidation. You work with a private lender to combine two or more obligations into a larger one. For the borrower, it means simplicity and not having to worry about several payments, all with different interest rates. Consolidating can also be a sort of hybrid version of a refinancing agreement if the lender creates a new loan contract, pays off all the old debt, and starts you fresh with one agreement.

Direct Subsidized and Unsubsidized Loans

If you can show financial need, it’s possible to get a federal subsidized loan based on the amount of need that exists. The school determines how much you’ll be able to ultimately borrow, and it can never be more than your determined amount of need. The key benefit is that you don’t have to pay interest until six months after graduation and interest rates tend to be lower than market rates. Unsubsidized funds are similar to their subsidized cousins with the main difference being that you’ll be paying interest from day one. Plus, you don’t have to show financial need to get the money. Your school will determine how much you can borrow, which can’t be more than your entire cost of attending school.

How to Borrow Responsibly

It’s important to make a plan before obtaining funding for a degree. The first part of the plan includes a detailed summary of how much money you’ll need to cover whatever expenses you can’t pay for yourself. You might have to do this on a year-by-year or multiple year basis depending on who you’ll be borrowing from. In any case, it helps to know your needs so that you don’t over-borrow.

The second part of the plan is to estimate your future earnings. There’s a lot of guesswork in this effort, but you can use published estimates of averages on various employment websites as a guideline. For example, if you’re in nursing school, it’s easy enough to find detailed entry-level salaries in any state or city. Use those numbers as an estimate to see if your monthly obligation would fit into a reasonable budget. Finally, consider speaking with a financial advisor who specialized in helping people who borrow for their school expenses. If you make a plan, decide on the kind of loan that’s best for you, and understand your future obligations, it will be much easier to focus on coursework and earn good grades on your way to that all-important diploma.

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