Terms to know when you take out student loans
Getting a handle on the central concepts of student loans as early as possible can help with borrowing choices now and the repayment process down the road.
The Free Application for Federal Student Aid, or FAFSA, is a government form that students (or their parents) must complete in order to be eligible for government-provided benefits—things like state grants, work-study funds and federal student loans.
Principal and interest rate
When taking out loans, there are two primary elements—the principal and the interest. The principal is the amount you borrow and will need to pay back. The interest is what the lender is charging you for the loan. Interest is calculated as a percent of the principal. The interest rate on a federal student loan is set by Congress through legislation, while the interest rate on a private student loan is set by your lender and can be affected by a variety of things, such as your credit history, whether you have a cosigner, the type of loan and the length of repayment, as well as other factors. Generally, loans with lower interest rates will cost you less over the course of your repayment term than those with higher interest rates.
Federal student loans
Federal student loans are funded by the government and offer a number of flexible consumer benefits that make them the go-to option for a majority of student borrowers. Federal student loans tend to offer greater repayment flexibility than private loans. For example, you may be able to delay payment up to 12 months in the event of economic hardship, as well as modify your monthly payment amount to better suit your income level. When taking out a federal or private student loan, you can generally postpone repayment until after graduation.
Subsidized vs. unsubsidized loans
Federal student loans generally fall into one of two categories: subsidized or unsubsidized. Subsidized loans are limited to students who demonstrate financial need. If you qualify for this type of loan, the government pays the interest while you attend school and, in some cases, for six months after you graduate (known as the “grace period”), as well as during a deferment period. Unsubsidized loans, on the other hand, are more widely available but do not offer this benefit. While you won’t have to start making payments on an unsubsidized loan until after school, the interest that builds up while you attend will be added to your principal for you to repay later on.
Federal PLUS loans are available to graduate students and parents of dependent undergraduate students. The Department of Education acts as lender, and your ability to borrow will depend on your credit history, as well as your eligibility for federal student aid. These loans are often paid directly to the school to cover expenses like tuition and room and board; if there is money left over, it will be given to you. The maximum loan amount is the cost of attendance minus any other financial aid received. Repayment on these loans kicks in as soon as they are disbursed, but they can generally be deferred as long as the student is enrolled at least half-time and for six months after that.
Private student loans
Private student loans are offered by private lenders, such as banks or schools. Generally, these loans don’t include as many financial benefits and protections as federal student loans. With private loans, you may be required to apply with a co-signer, and you may face variable or higher interest rates based upon your creditworthiness. When it comes time to repay your loans, you may have fewer options to delay or decrease your monthly payments. While private student loans may appear to be a less-attractive option than federal student loans, they can help borrowers fill the financial gap between what the government has lent you and the total you need to cover the cost of attendance.
Your credit score is a rating that indicates your creditworthiness, which represents the likelihood that you will repay loans and other bills on time. In the eyes of a lender, a high credit score indicates that a borrower will be more likely to make loan payments fully and on time. Your credit score may influence the terms and interest rates of any private student loans you take out. However, it does not generally have a bearing on your federal student loans.