Lori Meadows
Student loans are a financial aid option for students who need help covering college costs. They can be federal loans, provided by the government, or private loans, provided by banks and other financial institutions. With both types of loans, borrowers must pay back the money they borrow plus interest. Some federal student loans offer income-driven repayment plans, where the rate of repayment is based on the borrower's salary after college. Private student loans usually offer a choice between fixed or variable interest rates, with fixed rates providing predictable monthly payments, and variable rates potentially increasing or decreasing due to index changes.
| Characteristics | Values |
|---|---|
| Loan provider | Sallie Mae |
| Loan type | Federal and private student loans |
| Repayment period | Graduated Repayment Period (GRP) |
| GRP description | Interest-only payments for 12 months after separation or grace period ends |
| Eligibility | Students with eligible undergraduate, graduate, health professions graduate, MBA, law, medical, or dental school loans |
| Loan disbursement | Funds sent directly to the school, usually one disbursement per semester |
| Federal loans | Provided by the government |
| Private loans | Provided by banks and other financial institutions |
| Interest rates | Fixed or variable rates offered by private lenders |
| Repayment plans | Income-driven repayment plans based on borrower's salary after college |
| Repayment flexibility | Ability to change repayment plan after taking out the loan |
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What You'll Learn
Federal student loans
In cases where you are unable to make payments, federal student loans provide options to avoid default. You can request a pause in payments through deferment or forbearance. During a pause, it's advisable to pay off the interest to prevent it from compounding. If you default on your loan, you have two main options: rehabilitation and consolidation. Rehabilitation involves making nine months of reasonable payments to restore your loan to good standing and regain eligibility for federal student aid. On the other hand, consolidation is a faster process, but the default will remain on your credit report.
It's important to understand the specifics of your federal student loan, including eligibility requirements and repayment options. By staying informed and proactive, you can effectively manage your student loan debt and make financially prudent decisions.
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Private student loans
When considering a private student loan, it is important to research different lenders and compare their loan options. Some lenders offer benefits such as interest-only payments for a period after graduation, access to your FICO® Credit Score, and no fees for early repayment. For example, Sallie Mae offers a Graduated Repayment Period (GRP) that allows borrowers to make interest-only payments for 12 months after their separation or grace period ends. This benefit is available for various types of eligible loans, including undergraduate, graduate, health professions, and law school loans.
Your credit history and that of your cosigner, if you have one, will be evaluated when applying for a private student loan. A cosigner can be a parent, relative, or any other creditworthy individual who agrees to take responsibility for repaying the loan if you are unable to. Having a creditworthy cosigner may increase your chances of approval and help you secure a better interest rate.
It is recommended to consider federal student loans before resorting to private loans, as they have different eligibility criteria and may offer more favourable terms. Federal loans are offered by the government, and in some cases, the Department of Education pays the interest while the student is in school.
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Interest-only payments
With interest-only payments, you can make lower payments for a set period, usually 12 months, after your separation or grace period ends. During this time, you will only be paying off the interest on your loan, not the principal amount. This can provide budget flexibility while you establish your career.
For example, let's say you borrowed $26,000 at a 7.54% interest rate for a two-year program. Each month, $166 in interest would accrue. By making interest-only payments during your grace period, you can prevent this interest from being added to your balance, and your required payments will be lower once you start repaying the principal.
It's important to note that your monthly payments after the interest-only period will be higher than they would have been without it. Additionally, interest-only payments may affect your eligibility for borrower benefits or repayment incentives that require principal and interest payments.
While you can make interest-only payments on student loans, it is not possible to make "principal-only payments" on student loans, unlike some other types of loans.
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Repayment plans
The GRP allows borrowers to make interest-only payments for 12 months after their separation or grace period ends. This option is available for a range of student loans, including undergraduate, graduate, health professions, MBA, law, and medical school loans. By opting for the GRP, borrowers can benefit from lower monthly payments during this initial 12-month period, providing much-needed budget flexibility as they establish their careers.
However, it's important to note that the GRP may have an impact on eligibility for other benefits. Once the GRP ends, borrowers won't be eligible for forbearance or certain repayment programs until they have made at least 12 required monthly payments. Additionally, the GRP may affect eligibility for borrower benefits or repayment incentives that require principal and interest payments.
To enrol in the GRP, borrowers can check their billing statements or online accounts for information on when they can apply. These statements will also indicate which loans qualify for the benefit. It's worth mentioning that the GRP might not be the best option for everyone, as the monthly payments after the GRP will be higher than they would have been without it. Borrowers can save money over the life of the loan by paying more than the required amount.
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Borrowing options
After exploring these options, students can consider taking out private student loans from banks and other financial institutions. These loans usually offer either a fixed or variable interest rate. Fixed rates provide predictable monthly payments, while variable rates may fluctuate depending on changes to the loan's index. Private student loans often provide flexibility in repayment options, such as interest-only or fixed payments during school, which can lower the total loan cost. It is important to evaluate monthly loan payments and expected future earnings before committing to a private loan.
Additionally, some federal student loans offer income-driven repayment plans, where the rate of repayment is based on the borrower's salary after college. This can provide some financial flexibility as the repayment amount can be adjusted according to the borrower's income. It is worth noting that the Graduated Repayment Period (GRP) offered by some lenders allows borrowers to make interest-only payments for a specified period, usually 12 months, after which the monthly payments will be higher. This benefit can help students transitioning from school to their careers by providing budget flexibility.
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Frequently asked questions
Student loans where you can defer payments until after college include federal student loans, which are provided by the government, and private student loans, which are provided by banks and other financial institutions. Some federal student loans offer income-driven repayment plans, where the rate of repayment is based on the borrower's salary after college.
To apply for a federal student loan, you need to submit the FAFSA (Free Application for Federal Student Aid). There is no cost to submit the FAFSA, and you can fill it out as early as October 1st of the year before you will need the money for college.
Private student loans usually offer the choice of a fixed or variable interest rate. Fixed rates stay the same, giving you predictable monthly payments. Variable rates may go up or down due to an increase or decrease in the loan's index. Private student loans also offer different repayment plans, including options that allow you to make interest-only or fixed payments while you're still in school.
