Student Loans: 10 Things You Need to Know
As the cost of higher education continues to rise many students require financial assistance to pay for school. For many students, a significant portion of their financial aid consists of student loans. Both students and potential co-borrowers need to understand the different types of loans available to them, the resources available in the event of a hardship and the potential consequences of default.
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- Subsidized loans are awarded based on financial need. While you are in school the federal government pays your loan’s interest. Therefore, you do not accrue any interest before entering the repayment period. This will save you a great deal of money over the life of the loan.
- Unsubsidized loans begin accruing interest as soon as the loan is disbursed. If the interest is not paid, it will be added to the loan’s principal. You will pay interest on the principal of the loan, as well as any interest that has already been added to the balance of the loan. This capitalized interest means you will pay a significantly higher cost over the life of an unsubsidized loan.
- Credit cards are readily available to college students and are widely used to pay for housing, books and living expenses. The interest rates on credit cards are far higher than those on both subsidized and unsubsidized student loans. In addition, you are required to make monthly payments. Failure to make payments on credit cards will lead to a poor credit score and may affect your ability to obtain additional credit or even find a job.
- Ask the right questions about for-profit colleges. It is important to consider things like placement rates and accreditation. You should also compare tuition and fees to that of comparable programs at non-profit schools.
- Many lenders offer a grace period before regular payments must be made. Make sure you know the grace period duration for your loan so you are ready when your first payment is due. If you are unable to make your payment when it is due contact your lender.
- Default, the failure to make payment on student loans, may have serious consequences. If you default on your loan, your remaining balance and interest may become due in full and you may lose access to modified repayment plans. Also, additional fees and penalties may be added to your loan, your credit score and history may be damaged, your wages may be garnished and your tax refunds may be withheld. Your lender will also seek to collect, using all the above methods, from your co-borrower.
- Avoid default by contacting your lender if you are unable to make your scheduled loan payments. It may be possible to alter your payment due date or the structure of your repayment plan to better accommodate your budget. If you are experiencing financial hardship, you may be eligible for deferment or forbearance.
- Discounts may be available if you set up auto-payment for your account. Some lenders offer reduced interest rates when you develop a history of timely repayment. If you work in social services or healthcare fields you may also be eligible for student loan assistance. Contact your lender to learn more.
- Consolidation may benefit you. Consolidating loans with one lender allows you to make one monthly payment. It may also be possible to lock in a lower interest rate with a consolidated loan. Consolidating your student loans may make you ineligible for some repayment assistance programs.
- Do your homework. To learn more about student loans you may use the Department of Education’s Loan Repayment Estimator to calculate future loan payments and the total cost of your education. Canadians can learn more by visiting the Government of Canada Student aid and education planning resources.
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