It’s no secret that most college graduates need student loans to help pay for college. In fact, many students take out multiple student loans with differing repayment terms. That’s why it’s important to understand what loans you’re signing your name to. Understanding the types of loans you’re getting, staying proactive, and being mindful of your future debt can potentially save you thousands of dollars in the long run.
At Credible, we help thousands of students each week looking for ways to save on their loans. The following outlilnes key points to understand when you’re taking out your student loans and thinking about your future payments.
Fixed vs. Variable Rates
Student loan interest rates are dictated by market conditions and, as a result, they can vary from year to year. This is likely the reason why your loans have a different interest rate compared to the year before.
Federal loans have fixed interest rates. These loans have a static interest that doesn’t change during the entire duration of the loan. The interest rate is often higher than a variable rate, but is often preferred because borrowers feel secure knowing their monthly payment amount won’t change throughout the life of their loan. Make sure you know if you have subsidized or unsubsidized loans to be aware of potentially accruing interest.
Variable interest rate loans are loans with a fluctuating interest rate that changes every month or quarter, depending on the lender. This interest rate is charged on the outstanding balance of the loan and monthly payments vary with changes in the interest rate. Depending on the market, it’s possible for variable rates to be lower than fixed rates, but that is subject to change at any point during loan repayment. Variable rates usually come with private loans.
Paying interest In-School vs. After Graduation
Depending on your loan type, it may be wise to start paying interest on your student loans while a student. This is true for most loans except for Subsidized. Student loan interest gets added to your principle balance so the longer you go without paying interest, the higher your total debt will be after graduation. Putting $50 each month now could save you hundreds in the future. Talk with your servicer to see if this is an option for you.
Federal vs. Private Loans
Depending on your finances and which options were available to you as part of your financial aid, you may have a mix of both federal and private loans. Federal loans are from the federal government and are generally offered at fixed rates. These loans are one-sized fits all, meaning your interest rate is the same as all others with the same federal loans and not dependent on financial strengths. Furthermore, for borrowers pursuing jobs in public service after graduation, loan forgiveness on federal loans may be available after 10 years. Most students take out federal loan first before dipping into private loans.
Private student loans can offer flexible repayment terms. They’re funded by banks, credit unions, and/or other types of alternative lenders. The lender sets the interest rates and all terms of the loan depending on the credit history of the borrower, and if there is a cosigner, the cosigner’s credit history as well. There are many emerging private lenders that are less known, but are rivaling federal benefits such as deferment and other protective options.
If you are interested in comparing personalized private loan options to pick the best student loan, visit Credible.