If you’re like most high school students, the most pressing financial decision you’ve have to make is whether to fill up the gas tank or splurge on that new iPhone accessory. But then you applied to college, and once the excitement of acceptance letters wore off, you found yourself faced with one of the biggest financial decisions of your life:
“How am I going to pay for college?”
Obviously, if your parents have planned for many years to take care of your college expenses themselves, there’s not much to think about. But what if you don’t have the luxury of that financial safety net? A majority of college students need loans to get through their college years. But what’s the difference between the options?
Federal vs. Private Student Loans
A federal student loan is administered by the U.S. government and is often considered the “safer” loan option compared to privately administered loans. Why? Because federal student loans offer a bit of flexibility and security for new grads as they try to pay back their loans over time.
The interest rate (annual percentage of the outstanding loan that is charged to you on top of the amount you borrowed) is fixed with a federal loan, meaning it won’t increase over time (but it won’t decrease, either). If you qualify for subsidized student loans, the federal government will pay the interest on your loans while you’re still in school.
Federal student loans also defer payments until after you’ve graduated, and if you find yourself in a bind, you can further defer payment to a later date when you’ve landed your first job. If you are employed right out of college, you can base your loan repayment plan on your annual income, which can be quite helpful for those who don’t make much per year.
Banks and private lenders administer private student loans. A student may apply for a private loan if they didn’t qualify for as much federal aid as they anticipated needing to get through college, and if working a part- or full-time job while they’re in school isn’t a desirable option.
Private loans almost always require that you start paying them back while you’re still in school, and they have full control over your interest rate. (A little scary!) They also don’t offer flexible repayment plans, so if you are having a hard time making the minimum payment, you won’t have options to make life a little easier until you get back on your feet.
What Happens if You Don’t Pay Back Your Student Loans
Both federal and private student loans will affect your credit history if you don’t pay them back. That’s why this is such a big decision! Your credit score is going to determine what kinds of loans you qualify for in the future to purchase all kinds of things, including your first home, a car, or a line of credit to start a business.
The higher your credit score, the more eligible you’ll be for such things. By not paying back your student loans, your credit score will lower, possibly disqualifying you from making those purchases.
Get More Help with Student Loans
All these options for student loans can be confusing, which is why we’ve provided you with a financial aid quick guide! Click the link below to access the free guide, Financial Aid Quick Guide: Student Loans.