The most common mistake students make when borrowing for college is failing to recognize the types of student loans. There are a number of student loans. We here at Orange County bankruptcy attorneys will break each down and explain their benefits, or detriments depending on how you look at it.
Student Loan Types
Below is a list of common student loans provided.
Stafford loans are subsidized or unsubsidized as explained below. They are the most common federal education loan.
Perkins loans are low-interest federal loans for students who demonstrate extraordinary financial need. These Loans are administered by the school.
PLUS loans can cover expenses not met by other federal financial aid. Dependent students’ parents or graduate students can be take out these loans.
Consolidation Loans combine one or more pre-existing loans into one new loan with a fixed interest rate and (generally) a longer term.
Institutional Loans are non-federal aid that schools loan their students.
Private loans and state loans are not federal aid—however, they can help students ineligible for federal aid or those who do not receive enough aid to cover the cost of attendance.
For Stafford Loans, repayment begins six months after the borrower graduates, withdraws or falls under half-time enrollment at the school. Interest rates are fixed depending on the year the loans are taken. The borrower has typically 10 years to complete repayment. However, there are various repayment plans that can help borrowers stay current on their payments. We will discuss the payment options in Part 3 of this blog series.
Difference Between Subsidized and Unsubsidized Loan Types
In short, if it is possible, students always want to choose Subsidized Stafford loans rather than Unsubsidized Loans. [IMPORTANT] The US Department of Education will pay the interest on Subsidized Loans while you are in school at least half-time, for the first six months after you leave the school and during deferment or forbearance periods.
For Unsubsidized loans, interest WILL accrue during postponement of loan payments. This includes the period while students are in school.
Perkins Loans are for students who demonstrate exceptional financial need. Repayment begins 8 months after a student graduates, withdraws, or falls below halftime enrollment. Typically, the borrower has 10 years to complete repayment.
Although, Perkins Loans borrowers are limited in the type of payment plans, there are certain types of Perkins-specific deferments which we will get into in Part 4 of this blog series.
Parent PLUS Loans
Adoptive parents, stepparents and legal guardians of students can take out Parent PLUS Loans. Parents must have good credit and can use a co-signer. The interest rates are fixed depending on the year the loan is taken.
There are various repayment plans including the traditional 10 year plan. PLUS Loans also offer postponement options, however, interest will continue to accrue. We will further discuss these options in Part IV. In most cases, after disbursement, payment begins. However, for loans disbursed after 2008, borrowers can request payment to begin 6 months after the student graduates, withdraws or drops under half-time enrollment.
Grad PLUS Loan
These are loans for graduate or professional students. For loans disbursed after July 2008, repayment starts 6 months after the student drops below half-time enrollment. Otherwise, repayment starts after the student drops below half-time enrollment.
Interest rates are fixed according to the year the loan was taken.
A consolidation loan allows you to combine your federal student loans into a single loan with one monthly payment. This may be a good option if you can’t afford the monthly payments on your federal student loans. However, before exploring this option, you should first look into repayment options and forbearance options.
In some cases though, if you are too deep into dept the consolidation might be the best option for you. Additionally, consolidating may help you get a lower interest rate, and help you get out of default.
On the other hand, the consolidation might raise your interest rate or the amount of interest you will pay overall. You should definitely seek professionals to calculate the amount you will save, or lose if you consolidate your loans.
Institutional and Private Loan Types
These loans are non-federal aid loans provided by a bank or directly from the school. The loans may vary in interest rates and in some cases do not provide any repayment or deferment options. These are the loans that all borrowers should be wary of. All borrowers should discuss their options with a professional before taking out private loans. Many students, are unaware of the differences between private loans and the other federal-aid loans. This is where borrowers get into trouble. In the following blogs in this series we will discuss the repayment and postponement options to help keep your loans current.
In addition to managing your student loan debt, you should also consider reading our blog series on credit debt. Together, you can manage all of your debts into something more manageable.