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How do student loans work: everything you need to know

Are you a student in need of a loan to complete your education? If so, read our post to learn how do student loans work!

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by Thais Daou

Published on 11/02/2022

Get the help you need to finance your studies

Get a student loan. Your education will pay for itself later. Source: Adobe Stock

How do student loans work? Do you have any idea? In this article, you will discover how to finance your education in the U.S. and invest in yourself.

Temporary Assistance for Needy Families (TANF)

Some families are in very fragile situations financially and need government help. Temporary Assistance for Needy Families (TANF) is a program to provide this support.

You probably worry about paying for your studies in the U.S. Many Americans and international students feel the same.

But this should not ruin your plans. Because planning makes everything possible. Find out here how student loans work.

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What are student loans and how do they work?

Loans can help you study in the United States as a national or international student. Although most American students borrow money to study, borrowing money is a serious business.

If you are here, it is because you have already investigated other options. It is best to obtain as much money as possible. Money that you will not be required to repay.

Only use loans as a final resource. Compare different financial institutions’ terms and interest rates until you find the best long-term loan.

Remember, as with any other investment, think of the return. You will be making an investment in your future career.

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Rates and fees

Overall, 92% of student loan debt is federal. And interest rates range between 4.99% and 7.54%. Regarding private student loan, rates range from 3.22% to 14.96%, fixed; or 2.52% to 12.99%, variable.

However, there is no way to give numbers that are too specific. This is because student loan rates vary by lender, interest rate type, i.e., fixed or variable, and borrower’s credit score.

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Repayment options

If you have federal student loans, you have access to several different repayment plans from which you can choose. Here is a comparison of the two.

Only 2.4% of PSLF applicants have been approved. Therefore, choosing a good repayment plan does not guarantee loan forgiveness. Student loan forgiveness frees borrowers from part or all of their federal debt.

These borrowers have postsecondary loans. Some loans are forgiven for those in public service, education, or the military.

Minimum credit score

Most private lenders require a credit score of 670 or higher. But there is no problem if you do not have a credit history. If this is your case, you will need a co-signer with good credit and a steady income.

When checking your credit history, any potential lender may temporarily lower your credit score in the U.S. Your credit score can take months to rise.

Multiple inquiries within 30 days are treated as a single inquiry. And have a small impact on your score.

How much can you borrow?

It depends. Federal loan limits will depend on parents’ support and the student’s distance from school.

In other words, the finances of an undergraduate student’s family will determine if she or he can get subsidized loans. But which do not accrue interest.

It is a fact that dependent students rely on their parents financially.

That being said, dependent undergraduates can borrow from $5,500 to $7,500 per year, up to $31,000. If qualified, she or he can get $23,000 in subsidized loans.

Independent students are married, over 24, veterans, or self-supporting. They can borrow up to $12,500 annually and $57,500 in total. But they can only borrow $23,000 in subsidized loans.

What can you use a student loan for?

How do student loans work? Find the answer here. Source: Adobe Stock

You should use your loan to pay for books and supplies, meal plans and food, housing and utilities, both on-campus and off-campus, transportation and bus passes, computers, and software.

Or even any material you need for classes.

On the other hand, you should not use it to pay for food and beverages for parties, or vacation travels to distract the mind from studying.

Also, you can’t use it to take your roommates out to drink and buy a new car for status, an outfit for New Year’s Eve, or a subscription to a streaming service.

Types of student loans

Now that you know more about student loans see below what types are available!

Federal Student Loans

You can have many different types of federal student loans. So, read below for the main ones.

Direct Subsidized Loans

Direct Subsidized Student Loans are available from the US Department of Education.

This type of student loan is a type of federal financial aid. It is determined by the student’s cost of attendance minus the expected family contribution.

Direct Unsubsidized Loans

Undergraduate and graduate students can apply for low-cost, fixed-rate Direct Unsubsidized Loans. Direct Unsubsidized Loans are even available to wealthy students.

Parent PLUS Loans

Parents are given federal PLUS loans. The government investigates your credit and provides flexible repayment options.

Then, they fill funding gaps after federal student loans, grants, and scholarships have been exhausted.

Graduate PLUS Loans

The Grad PLUS loan is a federal direct PLUS loan for graduate and professional students that can be used for education and living expenses.

A Grad PLUS loan supplements unsubsidized direct loans for eligible students.

Direct Consolidation Loans

Direct consolidation loans combine two or more federal student loans into a single loan.

A fixed interest rate on a direct consolidation loan is based on the average loan rate. Borrowers pay nothing for direct consolidation loans. The application is completely free.

Types of Private Student Loans

Now, if you can afford private loans, at least two types are available in the market. See below.

Private Student loans

Private student loans, like federal loans, can be used to pay for college, but they come from a bank, credit union, or online lender.

After federal loans have been exhausted, private loans should be considered. For a variety of reasons, federal loans outperform private loans.

Private Parent loans

Private parent loans are education loans that the federal government does not provide to undergraduate parents.

Only the parent borrower is required to repay. The student borrows, and the parent cosigns on private student loans.

How to apply for a student loan?

You deserve to invest in the best education possible. Source: Adobe Stock

Student loans from the government are timeless. Subsidized loans are only available to undergraduate students (where the government pays the interest). Many incoming freshmen who have no credit history may require a cosigner.

Additionally, parent loans are available to creditworthy individuals who want to fund the education of a loved one. Grandparents, aunts, uncles, spouses, godmothers/fathers, and close family friends are all included.

Learn more about other loan options: medical loans

In conclusion, it is nice to be entitled to government assistance to support your basic needs. Besides the importance of studying, the cost of health care treatments also plays an important role in our lives.

See in our post below how medical loans may help you to plan health care costs!

Medical loans: Learn to finance medical treatments

If you need to pay for medical expenses but don't have the money to do it, you should read on to learn about medical loans!

About the author

Thais Daou

Thais Daou holds an undergraduate degree in Languages — Translating and Interpreting from São Judas Tadeu University. She has been translating, proofreading, and transcribing financial documents, as well as other fields, for five years. And now, she begins a new chapter in her career, writing about financial solutions in a simplified way, with a desire to spread this knowledge.

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