Terms you should know as you figure out your finances
At a Glance: Understand the difference between federal and private student loans. Federal loans are often more flexible and there are several options.
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Most people need a little — or a lot of — financial help when going back to school to get their degree. Fortunately, there are student loans.
They’re similar to a regular loan in that you borrow a certain amount and pay it back with interest. However, student loans have different attributes that may make them a good option to help bridge the gap between funds you have and funds you need for school.
A loan’s a loan, right? Nope. Here’s the breakdown on how federal and private student loans differ and some terms you should know before you make your financing decisions:
Federal Student Loans
These generally have lower interest rates and more flexible payment plans, and there are several variations:
- Direct Subsidized Loans are for undergrads who can demonstrate financial need. The U.S. Department of Education covers the interest payment when you’re in school, for the first six months when you leave school or during an approved deferment.
- Direct Unsubsidized Loans don’t have a demonstrated-need provision, and interest must be paid during all periods.
- Direct PLUS Loans can be taken by students in a graduate or professional program that leads to a degree or certificate, or by a parent of a dependent undergraduate student. In both cases, the student must be enrolled at least half time.
- Perkins Loans are for graduate and undergraduate students who can demonstrate “exceptional” financial need. The interest rate is five percent, but not all schools participate.
Private Student Loans
These come from a bank or credit institution and don’t always afford the same benefits as federal loans. Some may require payment while you’re still in school. The interest rates can vary and may not count as a deduction on your taxes. They’re usually ineligible for deferments and forbearances.
If You Can’t Pay
Most federal student loans allow you to hold off on paying under certain circumstances. If you have a deferment, your payments for the loan’s interest and principal are postponed. There are lots of situations in which you can defer, including unemployment, active duty military or Peace Corps service. If you don’t qualify for a deferment, forbearance allows you to hold off payments, but the interest still accrues on subsidized and unsubsidized loans. One of the many ways you can qualify for forbearance is if the total amount you owe each month is 20 percent or more of your total monthly gross income. And some loans are all or partially forgiven if you work in public service, teaching, child/family services, Head Start or are in active military service in areas of hostility. You might also be able to discharge loans if you’re totally and permanently disabled, or bankrupt.
No matter which loan you choose, make sure you fully understand the terms and exactly how much you’ll owe — and what happens if you can’t pay — so there’s no big surprise after graduation.
To learn everything possible about student loans, visit https://studentaid.ed.gov/sa/