Alternate name: Student loans
For example, many borrowers apply for student loans through the U.S. Department of Education (ED). Known as federal loans, this type of student debt comes with fixed rates and flexible repayment options.
How Student Debt Works
To apply for student loans, you’ll start by filling out the Free Application for Federal Student Aid (FAFSA). This is a requirement if you want to receive loans from the ED, and you’ll need to submit a FAFSA form annually to receive the money you need to pay for school. FAFSA filing season generally begins on Oct. 1 and the federal deadline for submitting FAFSA applications is June 30 for each academic year—although college and state deadlines may vary. Once you’ve filled out the FAFSA, you’ll receive an offer letter telling you how much you’re eligible for in federal loans. To apply for private loans, meanwhile, you can choose a bank or online lender. You’ll need to apply directly through the lender and choose your repayment option and interest rate type. The lender will run a credit check (or check your co-signer’s credit if you have one) to determine the type of rates you qualify for. While you’re still in school, you won’t be required to start paying back your student loans. But once you graduate, most lenders will give you a six-month grace period before you have to start making payments on the interest and principal.
Types of Student Debt
If you have any form of student debt, then you probably have federal loans, private loans, or some combination of the two. Here’s a closer look at both.
Federal Loans
Federal loans are a type of student debt offered by the ED. To apply for federal loans, you’ll start by filling out the FAFSA. The information you fill out in the FAFSA will determine how much you’re eligible to borrow. And for undergraduate students, it will also determine whether you qualify for direct subsidized or unsubsidized student loans. Direct subsidized loans are available to students who can demonstrate some type of financial need. If you qualify for subsidized loans, the government will pay the interest on your loans while you’re still in school. Unsubsidized loans, on the other hand, are available to all students regardless of their financial need. However, you’re responsible for paying the interest that accrues on your loan while you’re still in school.
Private Loans
Another type of student debt is a private loan, which is given by a bank, credit union, or alternative lender. Borrowers don’t have to fill out the FAFSA to qualify for private student loans. Instead, your lender will run a credit check to determine whether you need to apply with a co-signer. Federal loans come with lower rates and certain borrower protections you won’t find with private loans, and certain types of federal loans will be eligible for loan forgiveness after 10 years. But for some students, federal loans won’t cover their total cost of attendance. In this case, private loans could be a good way to fill in any gaps in financing.
Pros and Cons of Student Debt
Pros Explained
Affordability: Taking out student loans can make higher education more affordable for individuals who don’t have any other way to pay for it.Earn more money: As a result of attending college and earning their degree, many borrowers find they are able to earn more money and have more fulfilling careers.Build credit: If you take out private loans, your lender will report your monthly loan payments to the three major credit bureaus. This can help you build good credit over time.
Cons Explained
Starting out with debt: When you take out student loans, you’ll start your adult life in debt. This can impact your lifestyle and get in the way of other financial goals, like buying a house or starting a family. Failing to finish school: Some borrowers take on student loan debt without ever graduating from college. In this case, you still have to deal with the burden of debt but don’t have the benefits of a college degree.
