Types of student loans
There are several types of loans available to students. The simplest categorization is into federal student loans and private loans. Federally funded loans are administered initially through the US Department of Education’s Federal Student Aid programs, and are usually the easiest to get student loan consolidation services for. These federal programs disburse about $60 billion a year in loans, work-study support and grants. Stafford loans are the most common form of federal loans for students, but there are a variety of other federal payment plans – among them military / ROTC plans to pay for college.
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Private student loans are administered by standard lending institutions. Among the most common are Citibank student loans and the Sallie Mae Signature student loans. These lenders are basically providing unsecured (or in some cases secured) loans to you as a student, and will most often charge higher interest rates than their federal counterparts.
Private and federal loans, along with scholarships, can be combined to fund your education. However, it’s important that when it comes time to consolidate student loans, you do not mix the two types together. You should always consolidate your federal loans first, then separately consolidate private student loan debt. The benefits of consolidating your federal loans include: a lower interest rate (usually, but keep in mind that interest rates change every July 1), increasing the time for loan repayment to 30 years which reduces your monthly costs, and reducing the number of lending institutions you send checks to every month. For a more complete discussion of this topic and consolidation eligibility criteria, visit our page on how to consolidate student loans. Medical student loans fall into a special class, and are discussed on our medical school loans page.
Trends for student loans
Nearly 50% of recent college graduates took out student loans, with an average borrowed around $10,000 (1). Until recently, student loan interest rates ran between 6-8%. Recently, though, rates have fallen very low. As of fall 2003, Stafford loan interest rates were in 3-4% range (2).
Students who currently have loans, either a single loan or multiple loans, have a variety of options for reducing their payments and indebtedness. Because interest rates have fallen, loans can be consolidated or in some cases refinanced. When you’re considering refinancing student loans or student loan consolidation, you need to compare interest rates before you consolidate federal student loans.
Effects of student debt
Like any debt, student loans can influence your credit and your future decisions. Students who borrowed a substantial amount for college (more than $5000) are less likely to pursue higher education (1). In addition, student loan debt that exceed 8% of your income can be seen negatively when your credit gets assessed for future loans (this is especially true if you have one or more defaulted student loans).
Two ways to reduce the debt burden are: 1) reduce or eliminate the principal balance. Specific types of loans can sometimes be forgiven by service or other higher education – look into the specific student loan program you have. 2) Reduce your monthly payment. Since debt burden is measured by comparing your loan payment to your income, reducing your payment helps your credit evaluation.
References and Links
1. National Center for Education Statistics
2. Consolidation recommendations of the University of Michigan Law School
School loan consolidation – Information on eligibility and rationale for consolidating (or not consolidating) your student loans.
Student loan consolidation programs – A variety of specific options, including loan companies and different types of student loan consolidations.
Private Student Loans, PLUS loans and Stafford Loans – information on different financial aid and student loan options.