Student loans are a very scary topic when you’re a brand new adult and you’re going to college right out of school. Let me tell you, I didn’t know a single thing when I accepted those loans and vowed to pay them back in 4 or more years. Then you forget about them and forget that they’re accumulating interest over those 4 years – which is a scary thought especially if you have to pull out some majorly big loans. So, this post is to break it down into layman's terms to help you understand what you’re getting yourself into and to make sure that you can get out of debt (or not get into it at all) as quickly as possible!
I’ve had to take out each of these types of loans so I have first hand experience with all of them. These are my tips and tricks that I’ve learned the hard way so you don’t have to!
Private Student Loans
Private student loans are not funded or subsidized by the federal government. Instead, they are funded by banks, credit unions, or other types of lenders. The bank or lender – not the federal government sets the interest rates, loan limits, terms, and conditions of the loan.
Most private student loans you’ll have to pay back while in college. Which could be really difficult depending on your schedule and the time that you’ve allotted to work while in college. I worked my butt off to pay off my private student loans while in college. Seriously, I worked 40-50 hours a week while taking a full credit load. (I don’t recommend that – BTW.)
Be very careful when it comes to private student loans because there’s not a cap on how much they can charge you in interest. The average private student loan interest rate is 9%-12% which is crazy!
Another thing to be aware of is with private student loans – you may be dinged if you want to pay it off sooner. So, I wanted to pay off my loans as soon as possible but was charged an additional fee for doing so. This happens because the bank is "banking" on you making consistent payments over a period of time with a certain amount of interest attached to each payment. When you pay early, the bank doesn't get the expected interest payment because it hasn't had the time it needs to accrue within the month. You'll need to weigh the pros and cons of paying off this type of debt early – do the math to see if it's beneficial to pay off the debt early and eat the fee or pay it off in the allotted timeframe while making monthly interest payments. With your average government subsidized student loans – that likely wouldn’t be the case.
Direct Unsubsidized Loans
Unsubsidized student loans are a type of direct student loan to qualifying students. Unsubsidized means that the student borrower is responsible for the interest charged on the loan during the in-school and grace periods. Basically, interest accumulates on the loan the second you sign that piece of paper.
With this loan you do not have to demonstrate financial need when you apply for this type of loan which is great for students with parents who cannot afford a full college tuition.
You can choose not to pay the interest while you are in school and during grace periods, which is usually 6 months after you aren’t a student full time. This usually means after you graduate or if you decide that college isn’t for you and drop out. You’ll have 6 months of a grace period to find a job to start to pay back those loans. The interest will still accrue while you’re still in school and during your grace period.
Another downfall to this type of loan is that the interest will be added to the principal (or the total amount of your loan) meaning that your interest amount will slowly start to increase as you defer your interest payments.