Student loans are intricate and complex to navigate, making them a difficult topic to explore. To make informed, financial decisions about the future, it is critical to understand the types of student loans and the impact they have. The first step to decoding student loans is understanding the two primary categories of student loans: federal and private loans. Federal loans are backed by the government and are most often the preferred choice for many students. Within this category, there are two other branches of loans: subsidized and unsubsidized loans. By definition, subsidized loans are “need-based,” which means that the government pays the interest while the individual studies in school, ultimately reducing the long-term debt. On the other hand, unsubsidized loans are the exact opposite, as they accrue interest while the individual studies in university. However, this type of student loan is available to a wider variety of students and is based on education costs rather than being “need-based.”
Private loans aren’t connected to the government like federal loans and are offered by banks and various other institutions. These loans can cover the gaps that federal loans don’t cover in education costs; however, they come with high interest rates and few borrower protections. Private loans, and their terms and conditions, can vary from bank to bank, so it is essential to understand and review all options. The two primary categories of student loans have been covered, but there is a third, lesser-used type of loan: institutional loans. These loans have a lot more variability in what they cover, as they can be tailored to cover the specific needs of students; however, it is important to note that some institutional loans have unique terms and conditions, so it is crucial to review the options at hand. The different nuances of each loan type can directly impact an individual’s financial future, so it is essential to cover all options before committing to one loan. Be careful with terms and conditions and look out for interest rates!
While student loans themselves are a daunting subject, repayment options can be even more of a pain if not understood properly. There are a variety of options available, with different features and unique downsides/advantages. The first repayment option is called the Income-Driven Repayment Plan. For graduates facing uncertainty, this can be an amazing option. The plan is monthly payments that go by family size and income level, which means if overall income is low, the monthly payments are relatively manageable to pay off. Some different income-driven repayment plans are Income-Based Repayment, Revised Pay As You Earn, and Pay As You Earn. All plans offer some flexibility, but they ultimately increase the payment period, which means payment for interest and income increases over time.
The next default repayment option is Standard Repayment. This is a fixed monthly payment plan over a predetermined period (10 years for most federal loans). While it’s faster to pay off the loan and lower interest rates this way, this plan can also lead to higher monthly payments, which might be hard for most graduates to pay off with their first/second-year salaries. The last, longer option is Extended Repayment. If for any reason an individual might need more time to repay loans, he or she can sign up for an extended repayment. It reduces all monthly payments by extending the repayment period beyond the normal 10 years. While it increases total interest over the years, it might be wise for some to sign up for a longer commitment option that has lower immediate, monthly payments. There’s clearly a variety of repayment options, but picking the right one depends on an individual’s financial situation and goals, both short-term and long-term. Understanding all repayment options can help a student prepare for the future and combat student loan debt.
Perhaps the single biggest impact on one’s financial future is student loans. Missed or even late payments can jeopardize and tarnish an individual’s credit score, which makes it extremely difficult to make big purchases, such as a home or car. As seen in the graphic, 56% find it hard to buy a car, while 50% are held back from buying a house. Even longer-term goals are jeopardized by late or missed payments, such as collecting retirement money or starting a family. However, it’s very possible to avoid these problems, such as finding the right student loan plan and repayment option. There might even be loan forgiveness programs that can help on the way, such as Public Service Loan Forgiveness, which can help alleviate the stresses of debt. As college and payments are near, remember to keep an eye out for high interest rates and unique terms and conditions, as well as refinancing options. Don’t stress and make sure to plan properly to ensure a bright future.
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