Understanding Student Loan Interest Rates
Scholarships & Financial Aid
Student loans seem like a necessary evil, one you grudgingly accept to move forward in getting your degree. While they do provide the opportunity to pursue higher education, it is extremely important to understand exactly what makes them so tricky. Taking out a loan for school is one thing. Paying the interest rate that compounds over time are something else. It’s important to understand how interest rates on student loans are broken down and to have an accurate idea of what it will take to pay them back.
The two different loans are federal and private. There are pros and cons to both, so it’s important to be fully aware of what you’re getting yourself into and how it’s going to impact you in the years that follow your graduation.
First things first; let’s understand the difference between federal and private student loans. Federal loans are provided by the government. Private loans are issued by a lender, usually a bank, state agency, or school. The biggest difference is that the interest rate on federal loans are fixed and standardized across the states, though they can vary year to year. The other benefit that comes with federal loans is that they have an income-driven repayment plan. On the flip side, the terms and conditions of private loans are set by each organization.
Now, there are three types of federal student loans:
- Direct Subsidized Loans are borrowed through the Direct Loans program and offer a low, fixed interest rate and flexible repayment terms.
- Direct Unsubsidized Loans is similar to direct subsidized loans with the exception that students don’t need to demonstrate financial need to qualify.
- Direct PLUS Loans are loans for graduate degrees.
Private loans have more variables to consider.
They usually come with two interest rate options. The first is a fixed rate which provides predictable monthly payments. The second option is variable rates that may go up or down depending on the loan’s index. Private loans also offer a variety of payment options, including the ability to make fixed or interest-only payments while in school, which helps lower the total cost after graduation. They also provide flexibility in that they can be taken out by a student so long as they have a cosigner.
While all the different loan options may seem complicated, it’s worth investing the time into learning about your different options. There are sites like salliemae.com that explains it in far more detail. At the end of the day, the right option is out there. Just be sure to do your homework…so that you get the right loan to get to class and receive real homework.