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The majority (68%) of students who graduated from public and nonprofit colleges in 2015 had some student loan debt, according to the Institute for College Access & Success, an independent and non-profit group, and those borrowers had an average debt of $30,100.
It’s safe to say student loans are a common route to a college diploma, but there are many kinds of student loans, with different benefits and repayment options, so it’s important to know what your options are before you borrow.
The majority of student loan borrowers have federal student loans, and the most common loans come from the William D. Ford Federal Direct Loan Program. The Education Department lends federal Direct loans, and there are four main kinds.
To qualify for any federal Direct loan, you must fill out the Free Application for Federal Student Aid (FAFSA). Once your form is reviewed, you will learn what federal loans you qualify for through a school’s financial aid award letter.
Perkins loans are low-interest federal student loans for students who demonstrate “exceptional financial need,” according to the Education Department. Both undergraduate and graduate students may qualify. Because schools lend Perkins loans, how much you qualify for will depend on the funds that are available at your school, in addition to your individual financial need.
Undergraduates can borrow a maximum of $5,500 per year for a total limit of $27,500. Graduate students can borrow up to $8,000 per year for a total limit of $60,000.
Education loans you apply for at a bank, online lender or credit union are private student loans. These loans require a credit check, and the terms vary. Some private student loans have variable interest rates (as opposed to the fixed interest rates offered by the current federal student loan programs and some private loans), and repayment options may be less flexible than those available to federal loan borrowers. At the same time, if you have good credit, you may be able to qualify for a student loan with an interest rate lower than what the federal loan programs offer.
Federal student loan borrowers have several options for repaying their loans. The standard repayment period for federal Direct loans is 10 years (up to 30 years for consolidation loans), but you can choose a different repayment program, if you qualify. Repayment programs for federal student loans include the graduated repayment plan, the extended repayment plan, income-based repayment (IBR), income-contingent repayment (ICR), income-sensitive repayment, Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) and public service student loan forgiveness.
You may also apply for a deferment or forbearance, if you are temporarily unable to repay your student loans. You can read more here about repaying your student loans.
Whether you’re opting for a federal or private student loan, remember that it’s never a good idea to borrow more than you need. Keep in mind you’ll need to repay the loan whether or not you complete your education or get a job in the field you planned to work in, so do the math and think carefully about how much you can afford to borrow.
Making student loan payments on time can help you build a good credit score, but missing student loan payments or defaulting on your student loans can wreck your credit. On top of that, getting a student loan discharged in bankruptcy is very difficult (though not impossible). You can see how your student loans affect your credit by reviewing two of your credit scores for free on Credit.com.
You should also know student loans aren’t the only way to pay for college. If you can’t pay for school using your savings or income you get from working part-time, it’s a good idea to explore other options for financial aid.
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