The Answer Sheet: Student Loans

There are key differences between personal and student loans. Personal loans are for items like a car or a house, while student loans are used to fund education and living expenses you have while you attend school. If someone stops making payments toward their personal loan, the bank or credit union will repossess the car or home to help repay the debt. Since there is nothing to repossess with a student loan, the borrower may need a cosigner to repay it if the borrower does not.

If you ever declare bankruptcy, you will find out that student loans usually need to be repaid. Personal loans may not need to be repaid, but you may not be able to keep the item you purchased with the loan. Finally, student loans may have unique benefits such as forbearance or deferment which may stop or lower payments in certain situations. Personal loans may not.

You can obtain most federal student loans with bad credit or no credit, as they are based on financial need, not credit scores. Direct PLUS loans do however require a credit check and you must not have an adverse credit history. Private or alternative loans are another ball game – most if not all are credit based, meaning you need to have satisfactory credit to obtain them. If you do not have an established credit history, or if your credit is poor, you may need to add a cosigner to obtain a loan.

Interest is the cost of borrowing funds. It begins accruing when the loan funds are disbursed, and the rate may be fixed or variable depending on your loan terms. As you make payments on your student loan, your balance, known as the principal, decreases. This means that the amount of interest you pay decreases at the same time. However, your loan payment stays the same, so a higher percentage of your payment goes toward decreasing principal.

If your federal student loan is unsubsidized or you have a private student loan, interest charges accrue while you are in school and are added to your principal balance after you finish. One way many students decrease their payments after graduation is to make interest payments on their loans during college, so they have a lower amount to repay.

Parent PLUS loans are federal student loans issued directly to a student’s parents to help pay for college expenses. PLUS Loans require a credit check, offer various repayment options, and may be used to fill funding gaps after exhausting other student loan options, grants, and scholarships. You need to carefully assess if this is a good way to fund your education. PLUS loans have high fees and the interest rate is usually higher than you will get from a student loan at Bank of North Dakota.

Student loan repayment begins when your grace period ends, which is typically six months after you graduate, leave school or if you fall below a half-time student status. This grace period is meant to help you while you transition from college into your career and toward successfully repaying your student loans. If you are able, making payments while you are still in school or are in your grace period is a great way to reduce your student loan debt. It’s a good idea to check with your lender to be sure you know what their grace period looks like.

Choosing a student loan repayment plan is a very individual decision. What’s good for one borrower may not be the right choice for another. The standard repayment plan has a 10-year term. If you want to pay less in interest, you would need to repay the loan earlier. You could also make a larger payment than you are required and ask if you can apply the extra toward your principal balance. If you need lower monthly payments, you may want to consider an Income-Driven Repayment plan for your federal student loans. Graduated repayment plans keep the 10-year repayment term but start off with lower payments that increase over time. An extended repayment plan allows you to extend your repayment term up to 25 years.

Borrowers should research their options and choose the ones that best fit their situations.

Forbearance postpones payments under certain hardship conditions; however, interest continues to accrue on the principal balance.

Deferment also postpones payments during certain situations like while you are in school, participating in a graduate fellowship program or are on active duty military service. A deferment can be interest-free for some federal student loans. If you do not have a subsidized federal loan, interest will continue to accrue.

Student loan forgiveness releases you from the obligation to repay part or all your federal loan debt. The prospect of seeing that debt forgiven or canceled may seem like a dream come true. Though, not that many people end up being eligible. Requirements vary depending on the type of loan. One example of a federal student loan program is Public Service Loan Forgiveness. It offers forgiveness for those employed in certain public service occupations with qualifying employers, who make 120 regular, on-time payments under a qualifying repayment plan toward a federal Direct Loan.

A federal student loan may be discharged under circumstances beyond the borrower’s control. Here are a few of the situations:

• Permanent disability of the borrower
• Closure of the school during the time of study
• Falsification of the loan qualifications by the school
• Identify theft on someone else’s part to secure a loan
• Death of the borrower

No, you typically cannot make a payment directly with a credit card. But you may be able to use a third-party service to pay with a credit card. There is usually a fee associated with this though, AND if you don’t pay off the balance right away, you’ll end up paying interest, which could be a lot higher than your student loan interest.

Student loan debt can impact the amount of money you can save or spend on other things like a home or retirement. And if you don’t make your payments, it could impact your credit score too.