Student loans are often considered "good debt." While student loans can help you access educational opportunities and further your career, it is still a form of debt. Unfortunately, many of us take out student loans at a young age and aren't empowered with a lot of information. I know that I had little to no information when I signed up for student loans right after high school.
So if you are thinking about taking out student loans, there are some things you should know ahead of time.
Here are five things you should know about your student loans:
Public vs. Private
The first thing you should know is whether your student loans are public or private. Public student loans are often disbursed and managed by the federal government, while private loans come from private companies like Sallie Mae. It's important to know the difference, as they have different interest rates, as well as repayment terms.
The repayment terms of your loans depend on the lender and can vary widely from federal to private loans. Federal loans have several repayment plans available including Standard Repayment (10 years), Extended Repayment Plan (25 years), Graduated Repayment (where your payments increase over time), Income-Based Repayment, and more. For a full list of federal repayment plans, check out this informative chart.
Comparatively speaking, private loans often lack the same flexibility in repayment that federal loans offer and the terms of repayment vary from company to company.
Having a Cosigner
One aspect that is often not talked about with student loans is the role of the cosigner. At a young age, many students may have their parents co-sign their loans. An important thing to know is that if you are not on top of your payments and adjusting your plan as needed, you will damage their credit as well as yours. To avoid any adverse consequences, consider getting your cosigner released from the loan upon graduation when you are financially stable.
One of the most important variables when looking at your student loans, are your interest rates. Interest rates can vary widely from lender to lender and depending on the type of student loans you have, may have strict terms and conditions.
The first thing to consider is whether your interest rates are fixed or variable. Fixed interest rates are just like they sound - they are fixed at one rate. Variable interest rates on the other hand, can change at any time. It's crucial you know what type of interest rate you have, as well as the amount, so there are no surprises down the line.
Lastly, it's important to understand how interest affects your loans. Most loans in general have compounding interest rates, meaning that interest on the amount owed is not just calculated annually or monthly, but calculated daily. Don't be misled by a low interest rate - you will owe serious money in interest even with a 2-3% rate on a large loan. Higher interest rates can make it difficult to repay your loans and make progress on the principal balance.
Understand your interest rate, and whether it is fixed or variable.
Consequences of Not Paying
Student loan debt can be overwhelming and if you don't have an adequate income to pay them back, it can feel hopeless. But if left unattended, your student loans can have major consequences. If you do not pay back your student loans and do not communicate with your lender, your loans will go into default. If your loans are in default, the remaining balance on the loan is due immediately.
If you fail to make minimum payments for 270 days, and have not communicated with your lender, your loan will go into default. Aside from the havoc this would cause on your (and your cosigner's) credit, your loans could be garnished from your wages. Be sure to talk to your lender right away if you are unable to make a payment.
The good news is that this can be avoidable. The most common reason for default is a simple lack of communication. There are situations that will arise for many where they simply can't make their minimum payment. As already mentioned, there are options to get through this, even when dealing with private lenders. The main thing is to communicate with your lender!
In short, taking out student loans can make a great education possible - but if you are not careful, taking out student loans can have serious consequences. Empower yourself with information and understand all the terms, conditions, repayment plans, etc. before taking on debt. For further information, you can check out resources like FinAid as well as the government website on federal student aid.