Types of student loans
There are several types of loans available to students. The simplest
categorization is into federal
student loans and private loans. Federally funded loans are
administered initially through the US Department of Education's
Federal Student Aid programs, and are usually the easiest to get
student loan consolidation services for. These federal programs
disburse about $60 billion a year in loans, work-study support
and grants. Stafford loans are the most common form of federal
loans for students, but there are a variety of other federal payment
plans - among them military / ROTC plans to pay for college.
Private
student loans are administered by standard lending institutions.
Among the most common are Citibank student loans and the Sallie
Mae Signature student loans. These lenders are basically providing
unsecured (or in some cases secured) loans to you as a student,
and will most often charge higher interest rates than their federal
counterparts.
Private and federal loans, along with scholarships, can be combined
to fund your education. However, it's important that when it comes
time to consolidate student loans, you do not mix the two types
together. You should always consolidate your federal loans first,
then separately consolidate private student
loan debt. The benefits of consolidating your federal loans
include: a lower interest rate (usually, but keep in mind that interest
rates change every July 1), increasing the time for loan repayment
to 30 years which reduces your monthly costs, and reducing the number
of lending institutions you send checks to every month. For a more
complete discussion of this topic and consolidation eligibility
criteria, visit our page
on how to consolidate student loans. Medical student loans fall
into a special class, and are discussed on our medical
school loans page.
Trends for student loans
Nearly 50% of recent college graduates took out student loans,
with an average borrowed around $10,000 (1).
Until recently, student loan interest rates ran between 6-8%.
Recently, though, rates have fallen very low. As of fall 2003,
Stafford
loan interest rates were in 3-4% range (2).
Students who currently have loans, either a single loan or multiple
loans, have a variety of options for reducing their payments and
indebtedness. Because interest rates have fallen, loans can be
consolidated or in some cases refinanced. When you're considering
refinancing
student loans or student loan consolidation, you need to compare
interest rates before you consolidate
federal student
loans.
Effects of student debt
Like any debt, student
loans can influence your credit and your future decisions. Students
who borrowed a substantial amount for college (more than $5000)
are less likely to pursue higher education (1).
In addition, student loan debt that exceed 8% of your income can
be seen negatively when your credit gets assessed for future loans
(this is especially true if you have one or more defaulted
student loans).
Two ways to reduce the debt burden are: 1) reduce or eliminate
the principal balance. Specific types of loans can sometimes be
forgiven by service or other higher education - look into the
specific student loan program you have. 2) Reduce your monthly
payment. Since debt burden is measured by comparing your loan
payment to your income, reducing your payment helps your credit
evaluation.
References and Links
1. National
Center for Education Statistics
2. Consolidation
recommendations of the University of Michigan Law School
School
loan consolidation - Information on eligibility and rationale
for consolidating (or not consolidating) your student loans.
Student
loan consolidation programs - A variety of specific options,
including loan companies and different types of student
loan consolidations.
Private
Student Loans, PLUS
loans and Stafford
Loans - information on different financial aid and student loan
options.
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