How do Student Loans Work?

Table of Contents

Introduction

Every high school student dreams about going to college. But, only a few persons can afford the bills that come with pursuing a college degree. Many governments, colleges, institutions, and individuals offer different financial aids to students.

Scholarships and grants are usually limited, and there is high competition for them. Student loans have become a more accessible option in recent years for many students.

What Are Student Loans?

Student loans are monies that are given to students to help them pay for their college-related bills. These bills include tuition, accommodation, feeding, transportation, health insurance, books, projects, etc.

Student loans differ from scholarships and grants because they are repaid with interest. Borrowers usually sign a promissory note that includes all the terms and conditions for receiving the loan.

Also, lenders don’t supervise how students spend their credits. This is one of the reasons why America has one of the biggest student loan crises (about $1.6). Some students also use these loans for vacation trips. Others buy personal properties that aren’t related to their coursework.

Types of Student Loans

There are two categories of student loans: government student loans and private student loans.

Government Student Loans

Governments around the world provide different types of student loans. These loans are often available to only students in the government-owned institution. Government students’ loans come with a lot of benefits.

The interest rates are lower compared to private loans. Also, the repayment plans are flexible, and there are little or no penalties. Some government student loans come with an income flexible repayment plan that allows students to pay as they earn.

Students can also enjoy partial or total loan forgiveness in some countries. For example, the U.S. government grants loan forgiveness to borrowers who choose to work in the public service sector (including non-profit organizations) after some years.

The demand for government loans increases every year because of these benefits. The selection criteria are competitive, and the application process is time-consuming.

Private Student Loans

Private student loans are offered by lenders that are not affiliated with the government. These are often financial institutions like banks, credit unions, schools, and non-governmental organizations. Most private lenders are out to make profits for their businesses.

This profit bias makes most private loans come with high-interest rates. Also, the interest rate of some private loans may fluctuate with market conditions. Furthermore, private loans are not too flexible, and repayment defaults usually have dire consequences.

How to Apply for Student Loans?

Applications for student loans are often announced on the college website or by the lending institution. The eligibility criteria and application process for the loans are also stated in the announcement. There are high demand and competition for these loans. Always read the eligibility carefully to make a winning application.

You will be asked to sign a promissory note if the lender approves your loan request. The promissory record is the agreement document that describes the terms and conditions of the loan. Most private lenders also request a credit-worthy cosigner to improve the security of their investments.

Student Loans Interest and Repayment

Every student borrowing scheme has a specific maximum loan limit. The maximum loan limit is the amount maximum amount of money a student can borrow at a particular time. It could be fixed or cumulative, but there is always a limit. It is advisable to borrow only as much as you need because you will repay with interest.

Student loans work with simple interest. You will continue to pay the same attention throughout the lifecycle of the loan. For example, if you received a $25,000 loan at an investment of 10% per annum for six years, you will pay $2500 every year for six years.

Your total repayment amount will be $40,000. However, most loans are repaid monthly. So, instead of paying $2500 at the end of the year, you will be paying about $210 every month.

Always study and understand the repayment options of every loan scheme and its laws.

Repayment Defaults

What happens if you are unable to afford your monthly repayment? A lot of things could happen. These include:

Deferment

Deferment is a temporary halt of any loan repayment. Some deferment portfolio also stops interest from accruing while others outsource it. Everyone is not eligible for deferment. Deferment is often offered to volunteers and unemployed people. Postponement is rarely a private loan option.

Forbearance

Forbearance, like deferment, also puts your repayment on hold. But the interest on the loan will continue to accumulate, unlike suspension. Lenders often give restraint to borrowers in dire situations. Sometimes forbearance is mandatory.

Default

Students who are unable to pay their private loans often end in defaults. The default means that you have failed to meet the agreements for receiving the loan. It comes with many consequences, including litigations and seizure of assets (forced collaterals).

Forgiveness

Some students could receive total loan forgiveness if they are unable to repay their loans. However, there are qualification criteria. Some of these criteria include working in the public service sector (including non-profit organizations) or working in the military.

Re-financing

Refinancing is a great way to avoid defaults. It merely is borrowing to repay your loan. Only get a suitable lender that won’t exploit your situation against you.

Conclusion: You Can Avoid Student Loans

Collecting a loan should be your last financial aid option in college. Student loans come with some future risk that you can avoid if you explore other financial aid options.

You can research scholarship and grant opportunities. You can consider attending a college you can afford. You can take a part-time, freelance, or side-hustle job to support your education. You can cut on your expenses.

Lastly, if you must take loans, only take as much as you need to ace through college. Don’t collect credits to live beyond your means.

Introduction

What Are Student Loans?