How Do Student Loans Work?

How Do Student Loans Work?

Student loans are stressful but also essential if you want to finish that degree without making a severe dent in your savings. Loans are numbers, and not many understand how it exactly works. In this article, we will discuss how student loan works.

What are Student Loans?

When you borrow money from the government or a private loan provider to pay the college fee, it is broadly known as a student loan. You need to pay this money back to the respective authority. You can pay the money after finding a job or within a time frame stipulated by the loan provider.

Unless you are lucky enough to get a certain amount of loan forgiven, you will have to pay up. Loans are different from scholarships in this aspect.

How Do Student Loans Work?

You might be wondering how do student loans work. It’s relatively simple if we break it down into bite-sized pieces.

The Free Application for Federal Student Aid (FAFSA) provides each student with a form. This form requires the financial details of the parents and the student. Once filled, the authorities send it to the respective college for approval.

The approval process involves the college administration, especially the financial aid department, to look into its authenticity. Each student, depending on their financial status, is eligible for only a certain amount of aid. The financial aid department decides this grant, and they add the numbers in the award letter. The award letter then makes its way to the student.

This aid adds free money and helps you decide the amount of loan you have to apply for.

For private loans, a student must sign a document agreeing to pay the money back with the predetermined interest. There are other terms and conditions, and you must go through them before signing them.

Loan Interest and its workings

Here’s where the numbers come into play. Every time you try to find out how the student loan works, you’ll find yourself analyzing these numbers. But it is also bad news.

The interest applied to your loan amount is the extra money you agree to pay in return for their services. You need to equip your vocabulary with a few terms before you apply for a student loan.

  • Principal amount– The base amount you apply for, minus the interest, is the principal amount.
  • Rate of Interest– The extra money you end up paying, along with the loan amount, is the rate of interest. Federal loans have fixed interest, whereas private loans set the interest based on your credit score.
  • Repayment Term– This is the time allotted to you to pay the loan back. For federal loans, the minimum time is ten years. For private loans, this time will vary depending on the institution.

Simple math, is it?

Repayment Options

The loan that is assigned to you needs to be repaid. For federal loans:

  • The authority fixes the amount of monthly payment.
  • The amount to be paid increases each year steadily
  • Stretching of the repayment term beyond the standard timeline provided is
    possible.
  • The amount to be paid can depend on your monthly income after you finish
    the degree.
  • This repayment is based on your salary, including taxes, or after the
    deduction of savings from the salary.

In the case of private loans, there is a little chance for negotiation. The money to be paid per month is fixed and has to follow the same pattern throughout the repayment term.

If you have missed payments?

There are many ways to cope with a missed payment, but all of them are equally taxing. Here’s what happens if you miss your payment for a month:

  • Forbearance– During certain situations, the lender can put your payment on hold. The interest, however, accumulates based on the preset guidelines.
  • Deferment– In this case, the interest doesn’t accumulate over time. This option is applicable only during exceptional cases.
  • Loan Forgiveness– Another rate occurrence, but certain circumstances demand that the loan be forgiven, and you don’t have to pay any of the remaining amounts.

Alternatives to Student Loans

If you aren’t sure about student loans or how do student loans work, there are a few alternatives that might work in your favor.

  • Scholarships– There are multiple scholarships offered by the government as well as the college you’re applying to. Make a note of these and see if you fit the criteria.
  • Get a part-time job– A part-time job will pay your bills if you’re mindful about your lifestyle and savings. Avoid splurges and additional expenses.

Wrapping up

A student loan is the easiest way to get your education funded but also comes with its cons. This article is a comprehensive guide to understand how student loan works. It would be best if you choose wisely and carefully when applying for a student loan.

Leave a Comment