Loans to Pay Off Student Loans

Types of Loans, How to Make the Most of It

Though, education may be the most important investment for you, the stakes for a good education has been raised. Private and public institutions have increased matriculation. Public institutions, though charging lower, have also increased costs and have been rising rapidly and steadily because of lack of government support.

Because of the increased costs of education, students and borrowers have to bear the brunt and apply for loans. Basically, there are three types of undergraduate loans: direct federal loans; federal loans upheld by banks and lending services backed up by government; private loans; and loans from individual colleges. It is important, more than ever, to understand the kinds of loans available because of their variability in costs. You may end up paying one with the higher interest rate and therefore, pay higher costs.

Federal loans, whether made directly by government or by banks backed up by government have fixed interest rates. Stafford loans are available to students despite of financial need. In subsidized Stafford loans, government pays for some of the interest.

Perkins loans are given to students with extraordinary financial need while Pell loans are given to students from low-income families. The simplest way to avail of these loans would be through the William D. Ford Direct Loan Program, directly from federal government. These grants are awarded to students in institutions participating in the direct loan program. Students can avail of these federal loans through the Free Application for Federal Student Aid (FAFSA).
 
The maximum on interest rates on the Perkins loans is 5%; 6.8% for unsubsidized Stafford loans; 6% for subsidized Stafford loans; 7.9% for direct PLUS loans; and 8.5% for PLUS loans from banks. For Stafford loans, students can borrow $5000 in the first year, $6500 in the second year and $7500 in consequent years. The maximum a recipient can borrow is $31,000.

There are some differences in federal loans issued in banks. Although the maximum interest rate is constant, some banks offer discounts by reducing the interest rate and/or principal balance for borrowers under some specific circumstances. You need to be aware of this because many borrowers do not know of this benefit in the first place – making their payments more costly and the benefit useless.

Caution: Private Loans

Private institutions offer more money in the form of private or alternative loans. These loans behave like any other loan but they have higher charges than federal loans and interest rates vary in time. Mostly, private loans offer loans to cover for student loans.

Interest rates for private loans vary dramatically depending on lender and borrower. Because of the diversity in loans, students apply for the loan only to know the rate in which they pay – making repayment more challenging. It becomes even more difficult to forecast future monthly payments.

Students are recommended to borrow the least possible amount in private loans. Private loans also do not have the same benefits and established legal protection as compared to federal loans. This means that you do not need to pay a loan under specific circumstances like forbearance and deferment.