Niche Resources

Common Student Loan Questions, Answered

The best way to get the most out of borrowing money for school is to educate yourself on all the important terminology. Before you sign your name on the loan contract, allow us to explain some of the most common terms related to student loans:

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What is a student loan?

A student loan is a lump sum of money that a student can borrow from a public (the government) or private ( a bank) institution to help pay for school. The student is legally obligated to repay the amount of loan, plus interest in full. The institution providing the loan is called the lender.

What is the difference between private loans and federal loans?

  • Private loans come from a bank, credit union, state agency, or a school. Federal loans come from the federal government.
  • Private loan interest rates can be fixed or variable. Federal loan interest rates are fixed.
  • Private loans require the borrower to have a credit history or a cosigner. Federal loans do not require a credit history or a cosigner.
  • Private loans do not allow you to file for deferment or find an income-based repayment plan after graduation. Federal loans offer deferment and income-based repayment plans after graduation.

Generally, private loans tend to be less flexible when it comes to interest rates, repayment, and qualification, which can be an issue if you have trouble finding work after graduation.

Click here to read more about the differences between private and federal loans.

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What is student loan interest?

Interest is defined as “money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt”. In layman’s terms, interest is the money you have to pay in addition to the original amount as an added fee for borrowing the money.  Student loans have varying interest rates, that is, the percentage of your outstanding loan payment that you must pay in addition to the original amount.

How is my interest rate determined?

Interest rates are calculated differently for private loans than for public loans.  When borrowing from the government (public loan), the interest rates are set by the US Congress and the interest rate is fixed– it will remain the same throughout the life of the loan. Public loan interest rates can range anywhere from 3.5%-8%, typically.

Private loan interest rates are determined by the lender of that loan, usually a bank. The private lender considers the borrower’s credit rating (as in, the likelihood you’ll pay back your loan) and credit history (as in, your track record of repaying debt over time) when calculating the interest rate.  Private loans can be fixed or variable (the interest rates can change over time, so you could be paying more or less interest year to year). Private loan interest rates can climb as high as 18%.

How do I know if I have a credit history or a credit rating?

If you are a young student, chances are good that you have little credit history and a low credit rating. In order to establish both a good credit rating and a credit history, you must have a credit card (or a rental agreement in your name, bills in your name, or another documented repayment history) that you’ve been using and paying off in full for several years to show banks that you’re able to pay back debt.

Sound foreign to you? That’s okay! Unless your parents or guardians have generously set up a credit card in your name and helped you build up a credit history over time, you don’t have a credit history and it’ll be hard for you to be approved by a bank for a student loan. Fortunately, you can still get a private loan if you have a cosigner. Federal loans do not require a credit history, credit rating, or a cosigner.

What is a cosigner?

A cosigner (usually a parent or guardian) is somebody who signs on to a private loan with a borrower (the student in need), guaranteeing that if the borrower cannot pay back the loan, the co-signer will be legally responsible for the loan repayment.

When applying for a private loan (as opposed to a public loan), a cosigner is required since most students have little to no credit history and very little income, both of which are necessary for the bank to evaluate your ability to pay back a loan. Lenders are not likely to approve a loan for somebody with no proven track record of being able to pay back debt and little income to do it with.

How do I apply for loans?

Public loans are awarded to you after you fill out and file your FAFSA, the Free Application for Federal Student Aid. Students receive aid in the form of loans, grants, scholarships, and work-study.

When you’ve exhausted all your options in terms of scholarships and federal aid (public loans, grants, and work-study), you can apply for a private loan. If you have a credit history, you can apply for a loan by yourself, but it’s more advantageous to have a cosigner sign on to a loan with you so that you’re more likely to get approved, and if this cosigner has a good credit history, you can negotiate lower interest rates.

There are plenty of ways to apply for private loans– you can search online and through our partner, Edvisors. You can also contact a bank or credit union in your area to apply for a student loan.

When do I start paying back my loans?

If you take out federal loans, you have a “grace period” or a period of 6 months after graduation, which students usually need to secure employment and have enough income to make monthly payments. After the 6 month grace period, you must start repaying your loans and accrued loan interest in monthly installments.

Contact your lender to learn more about the different repayment plans. Staff is available to help you choose a repayment plan that fits your needs.

Private loan payments are most likely due while you are still in school.

What are subsidized loans?

Subsidized loans are federal loans that you might receive as part of your financial aid package after filling out the FAFSA. When you take out a subsidized loan, the government will not charge you interest on the loan while you are in school enrolled at least half-time and for 6 months after graduation. Student loan interest typically accrues (accumulate) immediately when you accept the loan money, so the government is essentially paying your interest for you, or “subsidizing” your education. You will not have to start repaying your loans until you graduate, leave school, or change your enrollment to less than half-time.

What are unsubsidized loans?

Unsubsidized loans are also federal loans, but when you take out an unsubsidized loan, interest accrues (accumulates) immediately. If you choose to not pay the interest while in school, your interest will accrue. You will not have to start repaying your loans until you graduate, leave school, or change your enrollment to less than half-time.

What is deferment?

Deferment is a benefit offered to federal student loan borrowers, which allows you to temporarily stop making your federal student loan repayments. During deferment, you are still responsible for paying interest on unsubsidized loans.

What is forbearance?

Forbearance is a benefit offered to federal student loan borrowers, which allows you to temporarily lower your federal student loan payments. During forbearance, you are responsible for paying the interest that accrues on all types of federal student loans.

What is loan consolidation?

If you have multiple loans that you are repaying, you can consolidate, or combine, them into one loan, called a Direct Consolidation Loan. You will then have a single monthly payment with an interest rate that is the weighted average of the interest rates on the loans being consolidated.

Consolidating your loans can provide additional repayment benefits and can extend the repayment period, up to 30 years.

What does it mean to ‘default’ on a loan?

You have defaulted on your loan when you have not made your scheduled student loan payments for a period of at least 270 days (about nine months), which can cause serious consequences for your ability to borrow money or own property in the future.

The negative consequences start earlier than that, however. Before the 270 day mark, the loan payment is considered “delinquent”, which happens on day one of the loan payment being overdue. After 90 days of non-payment, the loan servicer will report your delinquency to national credit bureaus, which will lower your credit score and negatively affect your finances.

What are the consequences of defaulting on a loan?

First and foremost, DO NOT DEFAULT ON YOUR LOANS.

Even before you default on a loan, your credit rating is negatively affected, which can seriously harm your ability to take out credit cards, get home or car loans, sign up for utilities, get an apartment, get a cell phone plan, and more.

Once you default, the entire unpaid balance of your loan and any interest you owe becomes immediately due. You can no longer receive deferment or forbearance benefits or any access to repayment plans, you lose eligibility for additional federal aid, you may not be able to purchase or sell assets such as real estate, and much more. In a nutshell, you will be in a bad financial position.

If you default on a loan, it may take you many years to reestablish good financial standing and a good credit record.

It’s very important to remember that there are repayment plans available to students who take out federal loans. Federal lenders are very willing to work with you to find a repayment plan that works for you. Some private lenders offer repayment plans, although it’s much rarer.

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Author: Alex Caffee

Former Marketing and Business Analyst at Niche. Dessert aficionado. Currently living and working in New York City.