Who does not know about student loans or education loans. The fees of top colleges and universities are extremely high. Many times the cost of higher education is simply unaffordable. Due to this, if you want to take admission in the top colleges then there are limited options available. Taking out a loan for students is one of the options that you can explore for higher education. Due to this, most students keep this as an option to bear the education expenses. There are some things due to which student loans can transform your life completely. Therefore, be careful before asking banks for money. In this article I will try and answer some of the important questions about education loans or student loans.
What is Student loan?
Definition of a student loan is simple. In simple words, you can describe this as a loan for students in order to continue education. The money you receive from banks is for education. The interest on student loans is also low and you get enough time to pay the loan back. In comparison with other loans it is much better when it comes to education. But there are complications too. Bank gives you money for a limited time. As soon as the time is over, EMI (easy monthly installment) starts which you or the guarantor must pay. Same as other loans, it is also like a rat trap that pushes you under debt even before you start earning. Therefore, make your decision wisely after doing all the real time calculations.
What is the student loans interest rate?
Interest rates on student loans keep changing time to time depending on current market conditions. Normally it ranges anywhere 6 percent to 10 percent depending on your credit score or your guarantor’s credit score. In most cases the applicant does not have a credit score. Due to this banks check the credit score of the guarantor. If the credit score is low then the interest rate will be on the higher side. Check with your bank before you put in your application for a student loan.
What are the types of student loans in the USA?
When it comes to taking out education loans, there are two types of student loans available in the United States.
These loans are state affiliated loans where profit making is not the primary agenda. The federal government offers direct consolidation loans through the Federal Direct Loan Program. You can also call them non profit and institutional loans provided by schools. These loans are subsidized due to which students get financial aid during studies. Federal loans may also include grants, scholarships and work opportunities as part of the total financial package. Additionally, the federal loans are less expensive than the regular student loans by private lenders.
Private Student Loans
Students who do not qualify for taking federal loans due to any reason apply for loans with private lenders. A private student loan interest rate is higher in comparison with federal loans. Students can contact private banks for borrowing money for education.
Student Loans Approval process
Most banks follow a simple process of approving student loans. There are three key steps for taking a student loan.
1 – Documentation
First of all, banks ask you to fill out the student loan application form. Along with this form, you need to submit your previous education records and an offer letter from college or university. This offer letter must contain complete fee related information. Other than this you need to show income proof of the guarantor because in most cases banks ask for it.
2 – Verification
As soon as you submit all the documents, the next step is verification of the loan documents. Banks verify the offer letter from university, credit profile of the guarantor and the employment records. In case you do not have a guarantor, they will verify your records. Incorrect information is also a common reason for student loan rejection. Due to this cross check the information before you submit the documents.
3 – Approval
Approval is the last stage of the student loan approval process. In most cases banks love to give you a loan because loan is the primary source of income for banks. If all the information is legit and accurate then you will get the money.
Can I take an education loan without a guarantor?
Yes, you can take an education loan without a guarantor if you have a good credit history. Improving credit score is a step by step process. Banks approve student loans early in case of good credit rating. Taking a credit card for teenagers and having a good paying history can help. If banks feel that their money will come back with interest, then you can get an education loan easily.
How can I have good credit history being a student?
Your parents can help you get a credit card at an early age. You just need to learn the right way of using a credit card and improve credit score. Making credit cards payment on time increases your credit score month on month basis. As you grow up and complete the schooling, you are ready with a good credit score. If you apply for a student loan then you may not need a guarantor.
How are student loans different from a small business loan?
First of all, student loans and small business loans, both are debts. Even if you take out a personal loan, the nature of debt does not change. You need to pay back the 100 percent loan with interest. There are only two differences. First is the interest rate and second is the pay back time. The interest rate on student loans is lower than the interest rate for small business loans. In the second scenario, banks give you enough time to pay back student loans but in a small business loan, the EMI starts from day one.
How a loan for students changes life
First of all we need to understand that only those students take student loans who cannot afford higher education. At least in most cases this rule applies. Additionally, every loan comes with an EMI (easy monthly installment) that you pay as per schedule. There are two different ways to look at this situation.
First thing that you can expect from an education loan is growth. Education can increase chances of employment. Every big corporation wants highly educated people. These companies conduct campus placements and recruitment camps. The idea is to hire top talents from colleges. This is not only important for your growth but also for the company. Talented employees can take the company to new heights.
Burden of Debt
There is also a dark side of student loans. As soon as you complete your education banks expect you to pay back. If you do not get the dream job, paying this money for the next 10 years is not easy. You will also have other responsibilities to take care of. Due to this, you may go into hardship. Above all, if you refuse to pay your credit score gets a hit. This will impact your prospects of getting a home loan, car loan or a small business loan. Due to this, take your decision wisely about student loans.
What is the difference between subsidized and unsubsidized loans?
The difference between subsidized and unsubsidized loans is the payback amount. In the case of a subsidized loan, the government pays a portion of the loan in the form of a loan subsidy. For brilliant students you can also get financial aid of up to 100 percent. Unsubsidized loans are the same as any other loan. You pay back 100 percent of the loan amount with interest. Check with the bank for the available subsidies available for student loans for more information.
Why does the total student loan balance increase?
This happens when you take a federal student loan and do not pay the interest. You are supposed to pay the loan back on time. If you miss the payment then your bank adds the following charges to your balance amount.
1 – Penalties on the unpaid amount
2 – Interest on unpaid amount
These two combined increase your principal amount also. Due to this the overall balance increases.
What are the most common Student Loans in the USA?
There are two types of common loan options for students available. One is a federal loan and the second option is private student loans. The majority of student loans in the USA are federal student loans. There are state sponsored loans where students get multiple benefits. Students can directly apply for these loans through their colleges.
What if I do not pay the loan, how does this impact the guarantor?
Banks already know you are smart enough to think like that. In case you do not pay back your loans it is not only you who gets impactor. The guarantor will have to pay the loan back. Normally, parents become your guarantors for student loans. If you do not pay it will impact their credit score.
What is student loan forgiveness?
Due to COVID19, the government of the USA announced this scheme for the unpaid loans. In case of a hardship, you can apply for a student loan forgiveness. Over 115,000 borrowers will benefit from this loan forgiveness program by the US department of education. If you fall in banks criteria of waivers they will offer partial forgiveness of loans or full if some government scheme is available. You can find all the details on the official website of the US department of education. Check with your bank because these schemes are for a limited time only.
How will I check my student loan EMI before actually applying for a loan?
You need to use an education loan EMI calculator to get the details. You have to enter the loan amount, interest rate that you are expecting and the tenure of student loans. The moment you click on the calculate button, you will get the result in a few seconds.
Can student loans be paid off early?
Sure, same as any other types of loan, you can pay back student loans in full whenever you want. As soon as you have enough money to pay back, it makes complete sense to pay the loan early. Additionally, this will also improve credit score in a positive way. The lenders will mark this as “prepayment in full”.
What happens when a student loan is paid off?
First of all, as soon as you pay back student loans you will be free from the liability. In real time it will also free up cash flow so you can enjoy the money. In addition, your move to repay student loans will make you eligible for other loans. You can also start a business or fulfill any other aspiration. The best thing is to create an investment portfolio that can multiply money.