If you’re starting to consider how to pay for college, you’re probably exploring your financing options. This article provides an overview of education loans in the States. We explain how they work, how they differ from other loans, other financing options, and more.
How Education Loans Work
Education loans function like typical loans: you borrow a set amount and repay it with interest.
Before getting the loan, you must meet your student loan lender’s eligibility criteria and provide appropriate identification. Typical requirements include US citizenship or residency and part-time enrollment at your chosen educational institution. Identification documents may include your social security number, birth certificate, and passport.
Education loans include agreements with terms and obligations that both you and your lender must follow. You can agree to pay a fixed or variable interest rate and repay it with the principal within a specified term (typically, five, 10, 15, or 20 years).
Education Loans and Traditional Loans: The Difference
However, they differ from traditional loans in several key areas:
- They’re Unsecured: Unlike traditional loans, educational loans don’t require collateral. In comparison, you must put up security to get a mortgage or a car loan.
- Deferred Repayment: Depending on your loan type and its agreement terms, you don’t have to pay back while studying. Federal and private student loans usually offer grace periods. In contrast, repayment of a traditional loan starts to run as soon as the loan disbursement hits your account.
- Federal Student Loans Can Be Forgiven: If you’ve diligently kept up with your monthly payment, and meet other criteria (e.g., you’re a public servant who’s eligible for public service loan forgiveness), the federal government can forgive the remaining balance.
- Creditworthiness Isn’t a Must: You usually don’t need good credit to get federal loans. The US government provides this financial aid as-is. Meanwhile, private student loan lenders are happy to extend a loan irrespective of the borrower’s credit history if they apply with a cosigner.
- You Don’t Always Get to Choose Your Loan Servicer: You can’t choose who services your federal student loan. The US government has designated federal student loan servicers who manage student loan payments for it. Although private lending provides some autonomy, your lender’s decision to sell its portfolio may affect this.
- Borrowing Limits Apply: Theoretically, there’s no limit to how much you can borrow from a traditional lender. The amount depends on their willingness to borrow and your repayment track record. However, the federal student aid you can receive is limited to your college’s total cost of attendance.
Another area where you can distinguish between traditional and college loans is in the latter loan type’s borrower categories. Education loan borrowers typically fall into three categories:
- Undergraduate students (whether dependent or independent)
- Graduate and professional students; and
- Parents
The above borrower categories matter because they determine the amount you can receive in student loans.
In contrast, ordinary loans cater to borrowers of all types (like business entities) excluding students.
Types of Education Loans
There are two types of education loans: federal and private. The former loan type originates from the US government (via the Department of Education), whereas private companies provide the latter type of financial aid.
Federal student loans can be further categorized into subsidized and unsubsidized loans. When the government subsidizes your student loan, you don’t have to make interest payments on them until you graduate and get a job. Unsubsidized loans don’t offer such coverage.
Thus, when you borrow from the US government, you can get one of the following loans:
- Direct subsidized loans
- Direct unsubsidized loans
- PLUS loans (for parents and graduates)
Where to Get a College Loan
You can get an education loan from the US government or a private lender (usually a brick-and-mortar financial institution or online company).
Visit the Student Aid website and fill out the free application for student aid (FAFSA) form to apply for federal college student loans.
To obtain private loans, check your selected lender’s website for their application process and lending criteria.
Repaying and Managing Education Loans
You must repay your education loans and the interest payments when they’re due. As mentioned earlier, your loan agreement determines when you’re expected to start paying.
Private lenders give you multiple repayment options. Four of the most common ones include:
- Immediate repayment
- Interest-only payment
- Partial repayment; and
- Deferred repayment
Of the four, the deferred repayment option bears the most similarity to how federal loan repayment works (including the provision of a grace period).
You can make repaying federal and private student loans manageable by consolidating or refinancing them.
Loan consolidation is available for federal education loans, while refinancing is an option with private lenders. In either case, you combine multiple loans into a single one, letting you make one monthly payment to a sole student loan servicer. While both options have pros and cons, they can help to streamline repayment.
Debt Relief Options
Students who encounter issues repaying borrowed student loan funds can fall back on the following debt relief options:
- Deferment: Deferment offers a temporary pause on monthly payments for up to three years. During this pause, unpaid interest may accrue, depending on whether your federal loan is subsidized.
- Forbearance: Like deferment, forbearance grants borrowers a pause on their payments. The similarity ends regarding the accrual of interest, which will occur irrespective of the loan type being repaid.
- Forgiveness: As mentioned, forgiveness entails forgiving an existing debt balance (subject to the borrower meeting specific eligibility criteria).
Check out our explanation of deferment and forbearance for more information on the subject.
Additional Ways to Get Study-Related Financial Aid
In addition to education loans, you have avenues to get the funds needed to finance your education. They include:
- Scholarships: The Federal Student Aid website describes a scholarship as a “gift” that doesn’t need repaying. Companies, nonprofit organizations, and other institutions award them for various reasons, including the applicant’s academic achievements or talent. Contact your desired school’s financial aid office to learn whether it awards scholarships.
- Grants: US government grants provide funding that generally doesn’t require repayment. Examples of federal grants include the Federal Pell Grant and the Teacher Education Assistance for College and Higher Education (TEACH) grant.
- Work-Study: This option is excellent for undergraduate and graduate students who need to earn money to pay for their educational expenses. Federal work-study programs provide part-time jobs for such students, with many of the jobs being related to their course of study.
The above options are excellent ways to save money and reduce reliance on, if not outright avoid, student loan debt.
Explore Your Education Loan Options
Managing student loans can be complex. However, with expert advice, you can simplify the process and make informed decisions that benefit your financial future. Get expert advice from Student Loan Professor to jumpstart your education journey today.
Brandon Barfield is the President and Co-Founder of Student Loan Professor, and is nationally known as student loan expert for graduate health professions. Since 2011, Brandon has given hundreds of loan repayment presentations for schools, hospitals, and medical conferences across the country. With his diverse background in financial aid, financial planning and student loan advisory, Brandon has a broad understanding of the intricacies surrounding student loans, loan repayment strategies, and how they should be considered when graduates make other financial decisions.