According to Student Loan Hero, almost $1.3 trillion of the $1.44 trillion in outstanding U.S. student loan debt is held in the federal portfolio. Then, private student debt makes up the remaining $140 billion. This can sometimes be called alternative student loans. However, this type of debt also carries several pros and cons when compared to federal loans as we will discuss in this post. Here, we will explore the advantages and disadvantages of student loans.
All about Student Loans
A student loan is a money that is borrowed to be paid back over time. In addition to repaying the amount borrowed, an interest has to be paid as well. Most college students sometimes borrow one or more student loans before they graduate because there aren’t tuition grants to cover college costs. Sometimes, students have to get side jobs to cover tuition costs in schools and avoid owing the system. However, are you wondering if taking student loans is good or bad for you? Let’s dig in and see for ourselves.
Types of Student Loans
Students generally apply for three types of loans during their stay in college. They are: Now, you understand these student loans, let’s move ahead to evaluate their advantages and disadvantages.
What are the Pros and Cons of Student Loans?
Before applying for any loan, you need to know how its benefits and disadvantages affect you as a student.
Pros of Student Loans
Of course, student loans have a lot of advantages which we will list as follows:
#1 Student loans give you the chance to afford a good college education.
Firstly, acquiring a college degree is necessary to earn more in any environment, but the college costs can be quite expensive.
Even when you lump in help from parents, it’s a really small percentage of Americans that can afford college costs without taking out any student loans at all.
For this reason, student loans are very vital to helping you achieve that degree of your choice.
#2 Student loans can help you build your credit score
Yep, very true. Student loans help college students build their credit scores significantly. So, having an excellent credit score will come in handy throughout the rest of your life as you apply for apartments, look for credit cards, and even while applying for jobs. Hence, you must make sure you are using your student loan responsibly and always making your monthly payments.
#3 Student loans are the difference between your going to that ideal school and going to any other school
Just imagine that you applied to that Ivy League school of your choice and they accepted. But, your parents couldn’t afford to take care of those college expenses. Basically, if you didn’t have access to student loans, you would be forced to go to the college that your savings could afford. But because student loans exist, you have the ability to choose which school you want to go to. The feeling of having a choice rather than just one option is really heartwarming.
Cons of Student Loans
It’s also important to note the disadvantages of obtaining student loans.
#1 Student loans can be expensive.
When you pick a student loan, you have to pay back with interest. This ranges anywhere from 4.45–7% for federal student loans (in 2018) to a high of 11–15% for private student loans. Hence, this is one of the major disadvantages of taking school loans. So, it’s important to accept federal student loans first, before turning to private student loans, because they are cheaper.
#2 It becomes a burden when you can’t pay off student loans
It might look like your world is coming to an end when you can’t pay off your student loans. Also, you can’t declare bankruptcy to get rid of the loans taken. Just imagine having to service a mortgage loan while still paying off your student loan. This can really take a hit on your credit score. And a bad credit score can follow you throughout your life. So, this is one major disadvantage of taking a student loan while in college. That’s why it’s important to pick loans you can easily pay back after graduation.
#3 Student Loans cause you to start life with Debt
Honestly, if you rely on student loans to pay off college costs, your adult life starts out in debt. Truly, a college education might give you the chance to earn more money than someone with only a high school diploma. But, depending on your debt, you might have a hard time finding a job that pays enough money to allow you to live a decent life and repay the loans as well.
What are the pros and cons of Federal and Private student loans?
If your back is against the wall and really there is nothing you can do to avoid dropping from college due to high cost, you can pick a student loan. By the way, you can also access several scholarships available for college students to help. In fact, knowing the advantages and disadvantages will keep you from making mistakes when picking a student loan. Not just that, it also helps you know the right loan that suits your repayment budget.
Pros and Cons You should consider when Picking a Federal student Loan
We all know that these government student loans are cheaper and easier to get than private student loans. But, is a federal student loan right for you? Let’s find out together.
Pros of Federal Student loans
Here are a few advantages of student loans provided by the government.
#1 You don’t need a cosigner to get this loan
Federal loans are not credit-based. For this reason, you don’t really need a co-signer to be concerned with covering the loan payment in any case you can’t repay. As opposed to private student loans that prefer to know that the student on the loan has experience borrowing and repaying with good credit history. So, you don’t need a good credit score to determine what interest rate you’ll get.
#2 There is less interest on subsidized loans
When you qualify for a federal direct subsidized loan, the government pays the interest on the subsidized loans, while you are in school at least half the time or in your grace period. So, this is advantageous for students with high financial needs because acquiring alternative student loans doesn’t have this option.
#3 You don’t need good credit to consolidate this student loan and also get it forgiven.
So, if you find yourself having multiple federal loans, you can easily consolidate student loans into one payment. You can easily do this without a credit check. This consolidation would also make some of your loans eligible for Public service Loan Forgiveness and income-driven repayment plans. In Federal loan forgiveness, loans are generally forgiven after 10 years, while working in a non-profit or for the government can also get your loans to be dissolved. This option does not really appear in private loans.
Cons of Federal Student Loans
Of course, there are limitations to getting federal student loans as we will discuss here.
#1 There is a Loan Limit
While acquiring a federal loan might be cheap, there are financial needs that exceed the limits you can borrow and college students are forced to supplement these loans with other funding avenues like Private student loans which charge higher interest rates. Also, those who are currently defaulting on any federal loan are automatically denied from applying for another. Well, until they get their loan to the default status.
#2 Not Available to all schools
Federal Direct Loans can only be used at colleges that release Title IV student financial aids. So, if you plan to go to a school that is not eligible for this category, you will have to find some other source of student loans to help you cover the college expenses. That can be disadvantageous if your dream school was not eligible for that category and you planned of applying for federal loans.
#3 Graduate Students are eligible for some favorable options in this loan
This is bummer, really! As a graduate student, you are not eligible for some options available to undergraduates, such as getting a Direct Subsidized Loan. Also, graduate students are charged a higher interest rate on their loans than undergraduates. According to Federal Student Aid, the graduate-student rate for the 2022 school year was 6.08% compared to 4.53% for undergrads. For this reason, it is a great idea to apply for scholarships available for graduate students.
#4 Inability to discharge in Bankruptcy
Students who borrow and cannot repay their federal loans will also not be able to escape them when they declare bankruptcy. They may have a slim chance if they fall under “undue hardship” but, it is very difficult to qualify for that category.
Pros and Cons You should consider when Taking a Private student Loan
Of course, should you choose to take a private student loan, let’s discuss its advantages as well as its disadvantages.
Pros of Taking a Private Student Loan
There are always a few merits to applying for a student loan as we will discuss here.
#1 They fill the funding gap when needed
When federal loans set limits on how much to be borrowed, students with bigger financial needs can rely on private student loans to help them cover their tuition expenses. So, these loans fill in the gap when federal loan options have been exhausted.
#2 They have Higher Borrowing Limit
Unlike federal loans, with alternative loans, students can qualify to take higher loans. You can even borrow up to 100% of your cost of attendance with little or no restriction, depending on your degree level and credit history.
#3 The Statute of Limitation
Hmmmph! Because your credit score will take a bad hit, it’s rarely advisable to default on a private student loan. But, it is comforting to know that your student loan has an expiry date. Well, that’s if the worst happens. However, the statute of limitations when you default may vary, from 3 to 10 years. So, this can be very advantageous, if you consider taking a private student loan.
Major Cons of taking private student Loans
Although the advantages of alternative student loans can be enticing, there are major drawbacks you should consider before making a decision.
#1 You need a Co-signer to get one
Many financial institutions require you to provide a cosigner for you to take a student loan. So, you can’t just bring anyone to qualify to get a loan. Your cosigner must meet the credit standards required to get the student loan. Worse still, if you qualify without a cosigner, as a young college student with limited credit history, you still pay a higher interest rate than federal loans. You then graduate from college neck-deep in debts you can barely repay.
#2 There are little or no repayment or Forgiveness options
As regards federal loans, loan defaulters can engage in income-driven repayment programs or are eligible for Public service Loan Forgiveness. But for private student loans, defaulters are rarely lucky to find any student loan repayment assistance. Hence, this can lead to their credit being destroyed more quickly than in federal loans’ case.
#3 There are little or no subsidized student loans
Yo! Forget it. Private student loans are rarely subsidized. Also, in the case of an unsubsidized loan, you will be responsible for all the interest on your loan regardless of the loan status.
#4 Loans cannot be consolidated
Unlike in federal loans, private student loans cannot be consolidated into a Direct Consolidation Loan. But, they can be refinanced with a private lender to give you a new interest rate.
You can apply for federal student loans as well as private student loans. For private student loan, you might need to provide a cosigner or have a good credit score.
It solely depends on your financial needs. You can apply for federal loans first, since they are cheaper, then supplement with private students loans if federal funding is not enough.
Of course, you can consolidate any student loans you acquire. It helps you reduce monthly payments significantly.
It depends. Consolidating federal student loans may be a good strategy to reduce monthly payments or to get out of default, but it is not always a good idea.
To get an international student loan programs, a student must get a cosigner who is a US citizen or US permanent resident, with good credit score, who has lived in the US for the past two years.
Well, you can consider taking students loans as “good debts” rather than bad debt because it affords you an opportunity to get a college education, which increases your overall earning potential.
Private student loans cannot be consolidated into a Direct Consolidation Loan but may be refinanced.
Because your credit score will take a bad hit, it’s rarely advisable to discharge student loans in bankruptcy. But, it is comforting to know that your student loan has an expiry date. Well, that’s if the worst happens.
Conclusion
Certainly, student loans are like the superheroes that come to save you from that pool of college expenses. But, education on their pros and cons can help you make informed decisions before you take any loan. Also, if you are in that tight spot and must take a student loan, apply for federal loans first and only use alternative student loans as your last resort.
References
Student Loan Hero – Statistics for 2022 Student Debt Warrior – Pros and Cons of Student Loans Nerdwallet – Government Student Loans: What Are the Benefits? Investopedia – Disadvantages of Federal Direct Loans
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