A good education is of absolute essence to be able to ensure an economically secure future. But getting an education has been getting increasingly pricier and most people these days cannot afford to pay higher education costs out of their savings or current income. This is where financial aid in the form of student loans come in. These loans help you fund your education with the stipulation that you pay it back once you get a job. Sounds clear cut and easy right? It can be, as long as you understand the factors involved in the process of choosing a student loan. Student loan interest rate There are two types of interest rates based on which you can choose a student loan.
- Variable interest rates This type of interest rates changes based on market rates. Although variable interest rates are low in the beginning, they tend to grow overtime. This increases the size of the payment and as a result you might end up paying more than you bargained for.
- Fixed interest rates The best thing about fixed interest rates is they stay the same for the entire duration of the loan. And since the interest rates do not change over time, the monthly installments remain the same. This makes it easier for you to estimate the overall cost of the loan.
Repayment plans and loan length When finding student loans that fit your needs, consider how much time you will need to repay the loan after graduation and how large the monthly payment will be. Look for flexible payment plans that help you fit the loan amount according to your budget. There are a variety of repayment plans you can avail of.
- Extended repayment plans This repayment plan offers 25 years instead of standard 10 years for borrowing over $30,000 worth of student loan.
- Graduated repayment plans The payment in this type of 10-year repayment plans starts out lower, increasing as time progresses. As a result, you get to keep your payments low when you have recently graduated from college.
- REPAYE Revised Pay As You Earn or REPAYE repayment plans are adjusted on the basis of your income and family size. This means the loan amount may fluctuate throughout the course of payment.
Origination fees It is one of the important factors for choosing a student loan. An origination fee is usually calculated in the form of a percentage of the total loan amount. Most federal loans have origination fees while private loans give you the option of no origination fees. However, a federal loan with say, a fixed interest rate of 4.5% and a 1% origination fee will cost you less when compared with a private loan with 8% loan and no origination fee. Defaulting on a loan In case there comes a time when you cannot afford your monthly payments, some lenders give you alternate options for repayment.
- Deferment It lets you reduce or postpone your payments temporarily. Deferment helps you decide if you need to return to college and attend classes before the loan is paid off. Federal student loans usually don’t even charge interest rates if you have opted for deferment.
- Forbearance Similar to deferment, it also lets you postpone your payment. Although, you are still liable to pay interest on the loan that is in forbearance.
