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Student Loans: From Terms to Types and More

Even though it’s still the middle of summer, for many students it’s time to start thinking about getting ready to go to college. As a college student, there are so many new things you will experience in the next year, like living in a dorm, picking your class schedule, joining extracurricular clubs, and more. This is an exciting time in your life, and at times it may seem like it’s flying by.

This is why it’s so important to think about your finances now, while you’re in the preparation stage. You don’t want to have to think about budgeting and loan options while you’re juggling a new job, class load, and social circle. When speaking to college graduates, the biggest thing they wish they had been told before they went to college was how loans work and the best ways to pay them off to avoid long-term debt. You can avoid the mistakes of students before you by educating yourself today.

By reading this blog, you will learn all about the types of loans available, common terms related to the loan process, and the pros and cons of private vs federal loans which will allow you to stay one step ahead of loan servicers as you navigate your college years and post-grad life.

What Do the Terms Deferment, Forbearance, or Grace Period Mean?

First things first, you need to know the terminology around student loans so you can feel comfortable talking about your loans and determining the path that’s best for you. It’s not a guarantee that you will land a well-paying job after you graduate, and you should be prepared for the worst-case scenario so that you can avoid being forced to make damaging financial decisions later on to compensate for those choices.

Deferment: You will see this term a lot as you apply for student loans. This is the act of putting off something until a later time, in this case, your student loans. All students that are enrolled in school on at least a part-time basis can defer their loan payments for six months after they graduate or leave school. This is called a grace period and you don’t have to be approved or specially qualified to do so. It will happen automatically. However, if you fall on hard financial times after the 6-month grace period you may need to go through the approval process for deferment. At this point, you can only defer for a total of three years (if you are taking out a federal loan). When you are in deferment, the government will pay interest on all of your subsidized loans, which is what makes this a popular option for those already drowning in other debts.

Not everyone is granted deferment on their student loans. You must meet certain criteria, such as being unemployed or only able to work part-time, serving in the Peace Corps, serving active duty in the military, or undergoing cancer treatment/have recently finished your treatment in the past six months.

It’s important to note that if you are taking out a private loan, you do not have the same deferment options as those who have taken out federal loans. A private loan servicer may not grant you a deferment at all. It’s important to read your loan agreement in full and ask your servicer to clarify any questions you have before you commit to a private loan.

Many financial experts will advise against getting a deferment on your loans, as you will lose out on the credit benefits that come with your loan account balance lowering over time. Your deferment will also be noted in your credit report that will be viewed by possible lenders. While your credit score should not be directly affected by a deferment, some lenders may be cautious to approve you for another loan based on this information.

Forbearance:This is another form of putting off your loan payments temporarily. What makes it different from deferment is that the government will not pay interest on your subsidized loans when you are in forbearance like they would when you are in deferment. However, if you have blown through the three-year deferment limit, a forbearance can be a solid option until you get back on track. Depending on your financial situation, you can request a general 12-month-at-a-time forbearance or a mandatory forbearance due to your financial difficulties. Just like the deferment rules, if you take out private loans, you may not be able to suspend payments as you would with federal loans, so it’s important to go over the terms provided by your loan servicer before you find yourself in a desperate situation. Any time you enter forbearance, it is noted in your credit report as well and could affect decisions made by lenders.

Grace Period: This is when you do not have to make payments on your student loan, also known as the six months between the time you leave/graduate school and the day the first payment is due. It’s important to note if you have certain types of loans, like the Parent PLUS loan, the grace period may not be as long as with others. Always check the loan documents to make sure you don’t miss a payment accidentally.

Default: This is when a borrower fails to pay back a debt according to the original agreement. The length of time that defines late vs default depends on your lender. For example, most federal loans hit default when you are behind on payments for at least 270 days. In general, you do not want to find yourself in default as it will affect other aspects of your life, including your credit, bank account, and even your career. Speak with your loan servicer before you find yourself facing default. You may be eligible for deferment, forbearance, or refinancing to help you get back on track.

How Many Different Student Loans Are There?

Now that you know some of the language surrounding student loans, let’s talk about the different kinds you can apply for. If you’re about to head to college, you’ve probably already looked at many different student loan options, but if you’re still debating or your situation changes in the future (as it’s likely to do), it’s good to know what is available. There are several different types of private and federal student loans, each with their own pros and cons. It’s important to know what your specific needs are before committing to a loan to avoid taking out more than you really need.

Types of Federal Loans

Federal student loans are easier to obtain than private ones, as they don’t require a co-signer or good credit like private loans often do. As long as you have a high school diploma, you are eligible to apply (you also must fill out the FAFSA application correctly and be approved).

You can then choose from:

Direct Subsidized Loans: The government will pay interest on these loans while you’re completing your undergraduate education, while you’re in your grace period, or when pausing payments through deferment. Your college will be able to tell you if you’re eligible and how much you can borrow. You need to have proof of financial need to qualify, however. If you are a graduate student, you are not eligible for this kind of loan.
Direct Unsubsidized Loans: You don’t need to prove your financial need to be able to get an unsubsidized loan, and you have access to them as an undergrad or graduate student. You will be responsible for paying interest at all times, which is something to consider if you are worried about finding a stable income after graduation. It is also important to remember that the amount of unsubsidized loans you borrow plus other financial aid cannot exceed the estimated cost of attending the college you have chosen.
PLUS Loans: If you are a graduate student or a parent of an undergrad/graduate student, you are able to apply for a PLUS loan. These loans have a higher interest rate and origination fee than other federal loans and you will need a credit check to apply. If you have a bad credit history, you may still be able to apply with a co-signer.

Cons of Federal Student Loans

Federal student loans do have origination fees that you will have to pay. If you take out a PLUS loan, that fee is even higher. Private loans typically don’t require these kinds of fees.
Federal loans have yearly borrowing limits and total borrowing limits. Unsubsidized loans have larger borrowing limits than subsidized. If you take out a PLUS loan or a private loan, you are mostly only limited by a school’s cost of attendance and will not face the same limits.
If you have stable finances and a solid credit history, you may find better interest rates among private lenders.
If you run into trouble with your finances and go into default, federal debt collectors can directly seize tax refunds or garnish wages indefinitely to repay the loan you took out.

Types of Private Student Loans

If you decide to go the private loan route, there are plenty of options for you. Banks can make private loans but will need to see proof you can repay it, usually by checking your credit score. Private loans can also be obtained with the help of a co-signer. You have several options available to you depending on your circumstances, such as:

Bar Exam Loans:If you are a law student or studying for the bar exam, you may qualify for this loan that can cover non-traditional costs like prep classes, living expenses, and exam application fees. Terms can range from 1-20 years but be warned that the interest rate will typically be higher than other private or federal loan options.
Boot Camp Loans:If you are taking a boot camp to learn job-specific skills or tech skills like coding, you may be able to apply for this kind of loan. Certain lenders have a pre-approved list of boot camps that they will cover, and some may even include living expenses. However, it’s important to remember that you will still have to have a strong credit history or a qualified co-signer for this loan. Sometimes these loans also have pretty high interest rates compared to other private & federal loan options, and they can have a large origination fee. If you’ve exhausted other options, this might be the best bet for you, just keep in mind the costs that come with choosing this option.
Bank Loans:If you are a customer of a community bank, you may have access to good terms and discounts on your private loans that a larger bank would not offer. At Availa Bank, we’ve partnered with the nonprofit ISL Student Lending to be able to offer you competitively priced loans and refinancing options.
International Student Loans:If you are not a U.S. citizen, you usually will not qualify for a federal student loan unless proven eligible. Private lenders have loan options for you, but often they will require a U.S. citizen as a co-signer.
Income Share Agreements:This is technically not a student loan at all. This is an agreement that offers funding for college that you will repay based on your future salary. If you are eligible for undergraduate federal loans, you should apply for those first. An income share agreement could come in handy, however, if you only qualify for high interest federal PLUS loans or private student loans and will graduate into a high-paying profession. This will likely get you more favorable repayment terms than more traditional routes.
Medical School Loans:If you are in medical school and have good credit, private loans may offer lower interest rates. However, if you plan on working for a nonprofit hospital after graduation, you will not be eligible for forgiveness options on your private loans since you would now qualify for federal Public Service Loan Forgiveness.
Student Loans for Bad Credit:If you are not eligible for federal loans that do not require a credit check, you may want to look into private loans for those with bad credit. The lender will decide if you should be given a loan based on additional factors like earning potential.

Cons of Private Student Loans

If you are just starting out or have bad credit, it can be very hard to get most private loans without a co-signer.
Interest rates are higher for private loans and will begin to accrue immediately until the loan is paid in full.
If you take out a private loan and fall upon hard times, 12 months is usually the limit for deferment, compared to the three-year limit on federal loans. Private loans also do not offer the income-driven repayment options that may let you pay $0 on your loans. You will only have access to short-term accommodations.
Private student loans are not included in most loan forgiveness programs.
If you miss a payment on a private loan, after 30 days you are typically put into default, and lenders can charge off the loan as soon as 120 days in so that it’s harder for you to get back in good standing.

What is Student Loan Refinancing?

Now that you know all about the different types of loans available to you, it’s important to know a little bit more about your repayment options should you have a change in income. This is called student loan refinancing, and it may be something you want to take advantage of.

Essentially, after you graduate and show a strong, responsible payment history, you may be eligible to refinance your loans. A lender will pay off your loans and give you a new repayment schedule with a lower interest rate. It’s important to keep in mind that if you have federal loans, you will lose your federal loan protections by refinancing and you will likely need a credit score of 690 or higher to qualify without a co-signer.

Refinancing can help you save money and get your finances on track after college, especially if you hold a Parent PLUS loan or are in/out of residency for medical school. It’s important to remember that you shouldn’t try to refinance your loans if you plan on taking advantage of income-driven repayment or forgiveness.

What’s Next?

With all of the knowledge of the options available to you now securely locked in your brain, start looking at your own loans! You may find that you have extras you didn’t need or you can make a plan to choose a different loan in the future that has more benefits for you. Talk to different loan servicers and see what they will offer you based on your current situation. You are not locked into a loan just by asking for more information. If you have questions, there are plenty of online resources to help you clarify your needs, or you can speak with a qualified Availa banker near you today!