Different Student Loans Have Different Considerations That Should Be Reviewed Before You Commit

It's very important to do your research first as there are many types of student loans, including many with hidden costs and fees

Different Student Loans Have Different Considerations That Should Be Reviewed Before You Commit
Image: Pexels
April 5, 2018

When it's time to get a student loan, you might be so excited to have a solid loan offer than you accept it right away. But you should always do your research first as there are many types of students loans and each one have different considerations that can make a difference when it's time to repay.

Types of Student Loans: Federal and Private

Federal student loans loans are subject to oversight and regulation by the federal government and include Direct Loans, Federal Family Education Loans (FFEL), and Federal Perkins Loans. You can get information about federal programs here.

Private loans, also called Alternative Loans, are made by private lenders and don't have benefits and protections that come with federal loans.

The William D. Ford Federal Direct Loan (Direct Loan) Program

The William D. Ford Federal Direct Loan (Direct Loan) Program is the largest federal student loan program. Under this program, the U.S. Department of Education is your lender. There are four types of Direct Loans available:

  • Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school.
  • Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students, but in this case, the student does not have to demonstrate financial need to be eligible for the loan.
  • Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid.
  • Direct Consolidation Loans allow you to combine all of your eligible federal student loans into a single loan with a single loan servicer.

The Federal Perkins Loan Program

The Federal Perkins Loan Program is a school-based loan program for undergraduates and graduate students with exceptional financial need. Under this program, the school is lender.

How much money can I borrow in federal student loans?

If you are an undergraduate student:

  • Up to $5,500 per year in Perkins Loans depending on your financial need, the amount of other aid you receive, and the availability of funds at your college or career school.
  • $5,500 to $12,500 per year in Direct Subsidized Loans and Direct Unsubsidized Loans depending on certain factors, including your year in college.

If you are a graduate student:

  • Up to $8,000 each year in Perkins Loans depending on your financial need, the amount of other aid you receive, and the availability of funds at your college or career school.
  • Up to $20,500 each year in Direct Unsubsidized Loans.
  • The remainder of your college costs not covered by other financial aid in Direct PLUS Loans. Note: A credit check is required for a PLUS loan.

If you are a parent of a dependent undergraduate student:

  • The remainder of your child’s college costs that are not covered by other financial aid. Note: A credit check is required for a parent loan (called a PLUS loan).

Comparing the Costs

Whichever loan you choose, and you may choose more than one, you should compare all costs. Private loans typically have higher fees and interest rates than federal loans. Private loans also have no cancellation or forgiveness options, so make sure to exhaust any federal loan options (including grants and scholarships) before considering private loans. Private student loans should not be considered your first stop for student loan funding.

Private Lenders Sometimes Use Deceptive Names, Logos, etc.

Some lenders and marketers use names, seals, logos or other representations similar to government agencies to create a false or misleading impression that they have some government affiliation. The federal government does not solicit or advertise. They do this in order to entice you into their student loan products where you can be charged large interest rates and high fees.

Steer clear of free gifts

Promotions, incentives and 'free gifts' are a clever marketing ploy to divert you from looking at the key terms of the loan. Don't fall for them. If you are getting any kind of gift or incentive to accept a student loan, it should be a giveaway that there is something surprising lurking in the fine print.

Scammers Are A dime a dozen

Under no circumstances should you give personal information over the phone, through mail, or online unless you know exactly with whom you are dealing. You may be giving your information to a scam artist. Scammers don't always succeed, but you don't want to give them an opportunity to get your information. Never give any information when a person or company solicits you by phone, email or text message.

do your homework on the lender

Check out the track record of the lender with the North Carolina Attorney General's Office and the Federal Trade Commission (FTC). You might find no complaints on file, or you might find hundreds of complaints about deceptive practices. But don't stop there! Do a web search for the company and pay attention to what others are saying. Don't stop at just the company's name. Search for any parent company name, any addresses and any phone numbers. It might be an old company operating under a new name.

high pressure sales tactics are a no-no

Avoid lenders with high-pressure tactics. If they say interest rates will go up if you don't consolidate immediately, walk away. Whether and when interest rates for consolidating your loans will change depends on what type of loans you have. Look at your loan documents to determine whether the interest rates are fixed or variable. If all of your loans have fixed interest rates, there may be no deadline to consolidate. If some or all of your loans have variable interest rates, when you consolidate into a fixed loan it may affect the interest rate of your loan. Anyone pushing you to make an immediate decision should be treated as suspicious.

Discounted Interest Rates can come with catches

Some lenders lower the interest rate on your consolidated loan, but only if you opt for automated payments from your checking account. Other lenders discount the interest rate on your consolidated loan, but only if your loan has at least a specified minimum loan balance. Still others agree to lower the interest rate on your consolidated loan, but only if you remain current on your payments for the life of the loan. You may want to consider loans with more immediate discounts, a shorter on-time payment period for interest rate discounts, or an additional discount for signing up for automatic payments, but you should understand what is needed in order to get these interest rate discounts.

It's not uncommon for a company to sell your consolidated student loan, but discounts may disappear

Some lenders sell consolidated loans to other companies. Because benefits of consolidated loans, like promised discounts, may not transfer, you may lose benefits if the lender sells your loan. Ask the lender whether the terms of your loan will change if it is sold.

You should stop and think before consolidating a federal student loan into a private loan

Be cautious about consolidating federal loans and Perkins loans into one private loan. The result of consolidating all loans into one non-federal private loan means that you lose all the benefits and protections provided in the federal loan programs, which can include cancellation and forgiveness. Private student loans aren't canceled. You'll always be on the hook.

Frequent consolidation after borrowing may impact timelines you need to meet to qualify for any benefits.