Money Smarts Blog

If you’re like most people, you probably don’t have the funds to pay for college tuition out of pocket. Without student loans, higher education wouldn’t be an option for most students. But just because the majority of students today graduate with debt, it doesn’t mean it’s the right move for everyone. Before you start looking for funding, it’s important to know your options.

First things first, students should max out their free and lower-cost options before turning to private funding. Free options are things like scholarships and grants that don’t have to be paid back. If you still owe after the free money has been used, lower-cost funding like Federal Direct Loans are the next best option. The more expenses covered with these funding sources now means less that’ll have to be paid back later.

Federal vs. Private Loans

If you can’t cover all of your expenses with federal student loans, be smart when you turn to private lenders.  Many private lenders don’t offer borrowers the same protections as federal loans, like deferment, forbearance and specialized repayment plans.

Generally speaking, federal student loans have lower interest rates than private loans. Some private lenders offer loans with variable rates, which could have an initial rate that’s lower than federal options. If you go this route, keep in mind that variable rates change—sometimes drastically. The low rate at signing could skyrocket after graduation. Before you sign anything make sure you’ve researched all your rate options and how they align with your repayment goals.

Co-signers & Credit Checks

Federal student loans don’t require a co-signer or credit check, which is good news for young borrowers with little or no credit. Most private lenders will require a co-signer, usually a parent or family member, who agrees to take responsibility for the loan if the borrower fails to make payments. The upside here is that if your cosigner has really good credit, you could get a lower interest rate.

When it comes to private loans, borrowers should shop around for the best rates—but be careful not to ding your credit in the process. Lenders will pull credit for both the borrower and co-signer to determine the interest rate, so you have about two weeks to comparison shop. After that, every inquiry can temporarily lower your scores.

Borrowing limits

Federal loans usually limit the amount that can be borrowed to the total cost of school, minus any awards (scholarships, grants or work study programs). Depending on the lender, private loans may just have a yearly limit, leaving it up to the borrower to decide how much to take. So it’s important to ask not how much you’re able to borrow, but how much you need to borrow and stop there. You might want a new big screen TV, but you’ll end up paying way more for it in the end.

Repayment

Most student loans have a standard repayment term of 10 years but, with deferments & specialized repayment plans, the average actual repayment is closer to 20 years. Depending on your interest rate, an extra 10 years could mean a lot more money spent overall.

No matter what kind of loans you end up with, federal or private, you’re stuck with them until they’re paid in full. Unlike other debts, student loans aren’t dismissed in bankruptcy. With few exceptions, student loan forgiveness is pretty much limited to death and total and permanent disability.

Need funding to fill your payment gap? IH Mississippi Valley Credit Union offers undergrad, graduate and consolidation student loans that won’t leave you with a mountain of debt. Learn more or apply online at ihmvcu.org/studentloans.