Students are more aware now then they were in the past, but it bears repeating – student loans are not free money. You will have to pay the money back, and the longer you take to pay it off, the more you’ll pay.
But student loans aren’t just a burden; they are very, very helpful as well. They give people a shot at a college degree when they may have been unable to afford it otherwise.
You don’t need to be an expert in personal finance to find a tenable arrangement (unless you’re going to school for personal finance). If you are straight with yourself about your student loan debt and repayment options, and understand some key terms related to student loans, you can manage your debt in the long term.
Choose Between a Federal or a Private Loan
There are two options when it comes to paying for college – private student loans and federal student loans. In the former case, you borrow money from the federal government, and in the latter, you’re borrowing from a private credit union or bank.
With federal student loans, you will apply through FAFSA. One of the benefits of using federal student aid is that they don’t check your credit score. The federal government operates an income driven repayment plan that lets you restructure your student loan payment for tolerable monthly payments.
With a loan from a private entity, like a credit union or bank, you may be able to find lower interest rates for your financial aid. Credit unions have membership restrictions so they can offer much better terms than federal sources.
Look for subsidized loans if you qualify (they’re engineered toward students with dire financial needs) as these types of loans won’t collect interest while you’re still in school.
The Faster You Pay It Off, The Less You Pay
If you can agree to a shorter period to pay off your loan, opt for this path. You will pay more each month than if you stretched out your payment plan, but it’s worth it.
However backward this idea may seem, it ends up working for you in the long run by avoiding interest charges on your loan. The aim is to be debt free after a certain number of years; a shorter payment period can help you stick to this plan.
You will also need to pay a loan payment for federal student aid loans, which is different from interest in that it is a one-time fee, whereas interest is added to your loan amount incrementally.
Interest rates change from year to year. If you’re working with a bank or credit union, your interest rate will depend mainly on the credit score of you and your co-signer.
Understand What a Grace Period Is
A grace period is the time allowed before your first payment and should be stated in your loan contract’s terms and conditions. It always pays to read the fine print.
This grace period can be hugely influential for students who need to get a few paychecks saved up before they begin paying off their student loans. If you have the savings, you don’t need to wait until the grace period is over to start paying off your loan. Paying it off sooner helps you avoid future interest accruement.
Although you can begin paying off your loan well before the grace period is over, you should not miss those crucial first payments. Missing student loan payments is a surefire way to tank your credit, making it harder to get loans in the future.
Refinancing is Different Than Consolidation
As you work toward a better future, you should have a specific goal for your student loan contract – smaller monthly payments. Two tools that come in handy when you’re trying to diminish your monthly payment are refinancing and consolidation.
When you consolidate your loans, you are amassing them into one loan payment, and the interest rates will probably be an average of the rates you have on your other loans.
Refinancing is when you rework the terms of your loan contract in a more favorable financial moment. To make refinancing a viable option, you need to research what the current interest rates are so you will pay less each month than you had been before.
Understand Forbearance and Deferment
Two processes can help you manage your personal finance portfolio when times are sparse – forbearance and deferment.
Forbearance allows you to stop making monthly payments for a period, although interest will still accrue. Deferment is a suspension of both the monthly payment and interest, but there are specific qualifications you must meet if you would like to defer your student loan payment.
To qualify for a deferment, you need to have a Subsidized Federal Stafford Loan, a Direct Subsidized Loan, or a Federal Perkins Loan.
You Can Only Use Loan Money for Certain Expenses
It may come as a surprise, but you can’t spend the loan money on anything you want. The chunk of money that you borrow doesn’t work like a credit card; you can’t bring it anywhere and pay for anything you’d like with it.
The purchase must directly correlate to education, like books, clothing, and meals during your student years. Unfortunately, you can’t buy a car with your loan money, even if you need it to get to college.
Some Ways Around Student Loans
There are some ways to subsidize your college education. Scholarships, joining the military, or working for the University you’re attending are all great ways to minimize the amount you’re paying to the institution.
Be sure to check in-state colleges and universities to see if they have opportunities for those applying locally. If a member of your direct family works for a university system, you may be able to find a discount through their employment.
The Final Word
If you understand the different types of loans, grace periods, and terms like consolidation and deferment, you can make your student loans work for you.
If you would like to speak to a personal finance expert, contact T.I. Credit Union to learn more about membership and interest rates on student loans.