Student loans are a helpful way to finance your higher studies, but they are not the best option out there. If statistics are any indication, most students complain that they weren’t fully informed of their options before taking out the loan. That’s not all! Some students even make the mistake of taking a loan without reading the terms and conditions stipulated in the agreement.
If you are wondering what are student loans, this article is for you. Here, we will give you an overview of student loans and help you understand what you are getting into before you sign the dotted line.
All You Need To Know Before Taking A Loan for Education
Federal loans protect borrowers with options like loan deferrals and forbearance. They give students a grace period of 6 – 9 months after their graduation to get a stable job before they start repaying the loan. There are also other income-based alternatives that offer some flexibility to borrowers. However, private loans do not typically provide the same privileges to students. Their interest rates, fees, and borrower protection policies differ from lender to lender.
- They Mostly Offer Variable Interest Rates
Federal loans come with a fixed rate of interest, making it easier for borrowers to know their monthly payments beforehand. Private loans, on the other hand, have variable interest rates. Sometimes private loans may appear more attractive than federal loans because they offer cheaper interests. However, it is possible that these rates may double or triple during the course of the loan term, making it considerably more expensive.
- You Will Need A Co-signer
Since undergraduate students do not have a lengthy credit history, a private lender will ask for a co-signer on their loan to safeguard their capital. Students will be required to add another person to their loan application. This cosigner should have a solid credit history and take the liability of the loan in case the students default on their payments.
Another important thing to note is that shopping for loans can impact your credit scores. According to industry experts, when borrowers shop for private loans, they can do so for the first two weeks. Following this period, each report pulled out by the lender to assess the borrower’s creditworthiness can impact the credit scores by up to 5 points. A student or a co-signer who is on the edge of qualifying for a loan may jeopardize their application by shopping too much.
- There Are No Limits To This Loan
While federal loans come with a strict limit, private loan lenders will leave it to the students to decide how much debt they can handle. This no-limits facility offered by private lenders can easily lure students to bite off more than they can chew. Sometimes they borrow a lot more than they need and then struggle to pay it back. This is why it is important to assess your budget and take only what is absolutely necessary. It is strictly recommended to not take the maximum you are eligible for.
- You May Be Eligible For Tax Deductions
The most interesting benefit of funding your study with student loans is that you become eligible for tax deductions. Families that are paying student loans may be allowed to deduct up to $2,500 each year in taxes. However, to be eligible for this, the student must be enrolled for at least half the term in an accredited college. The families should also have their joint incomes less than $160,000 or adjusted gross incomes no more than $80,000.
The only loans eligible for this benefit are the ones that were taken out from a private lending institution and the money was used solely to pay for the education. Anything outside of this is not eligible for tax deductions.
- There Is No Borrower Protection
Unlike federal loans, private loans will not be written off in case of bankruptcy. The only exception to this is the death or permanent and complete disability of the borrower. This means that even if the variable interest on your loan is flying out of control, you would still be required to pay the loan in full. Failing to do this will result in wage garnishments, lawsuits, collections, etc.
- Personal Loans to help you with education & other expenses
You can get access to a good quality education with the help of personal loans. If you need more money to cover other expenses such as moving and travel cost, then go for a personal loan. The loan can help you sustain yourself until you find a part time job. You can also take help with personal loans from experts before you choose one. In fact, there are variety of personal loans which can be a quick source of cash, typically without the high interest rates of a credit card or credit card cash advance.