What is a student loan?
A student loan is a type of financial assistance designed to help students pay for school-related fees, such as tuition, school supplies, books and living expenses.
Many of these loans are offered to college students at a low interest rate. Typically, students are not required to repay these loans until the end of a grace period, which begins after they have completed their education.
Not all student loans are the same. Some are private, some are federally funded, some are designed to help financially needy students, and some offer borrower protection and lower interest rates.
The federal government issues some student loans. Federal student loans typically offer low, fixed interest rates. This makes them much more attractive compared to private loans offered by commercial lending institutions.
Many federal loans offer interest deferment programs, in which the government covers the loan’s interest while the student is studying. Students are not obligated to start paying on the loans until after they graduate.
Commercial lending institutions also offer loans to people entering college. Unlike federal student loans, private student loans require a full underwriting process.
Banks typically require borrowers to have a positive credit score and enough income to make loan payments. If borrowers do not meet those requirements, they may need a co-signer to be eligible for private student loans.
Borrowers should also note that private loans come with higher interest rates compared to federal loans, and may come due in a shorter period of time.
Student loan example
In addition to commercial loans, there are three major types of student loans from the U.S. federal government. These include the Perkins loan, the Stafford loan and PLUS.
- Perkins Loans are federal loans in which the college or university where the student is attending is the lender. The university gets the funding for the student loan from a pool funded by the government.
- Stafford Loans are strictly regulated by government rules. Rather than being based on credit score or financial need, these loans are typically available to any student. These loans also have low interest rates.
- PLUS loans are federal student loans offered to parents. They work much like a commercial loan.
That being said, federal student loans have some downsides. The availability of some loans, such as the Perkins Loan, is based on the student’s need.
Even if the student could really use the loan, the federal government may deny his application based on the adjusted gross income of the family. There also are limits to the amount of loans that can be borrowed from the government.
If you need information on student loans, check out this webpage at Bankrate.com.