There are two primary ways to finance a college education. You can either borrow money from the federal government, or you can secure loans from private institutions that specialize in loaning money to students. If you take out a loan from a private borrower, there are some important things you need to know.
Federal loans provide mandatory protections for borrowers, including some deferment and forbearance options, but private loans offer borrowers a variety of rates and fees. The rates on private loans tend to be much higher. That’s why it makes sense to max out your federal loan options first.
Federal loans are generally fixed rate loans, making it easy to budget every month for their repayment. But private loans are often times variable rate loans. They may start with a very low-interest rate so that they look attractive, but they will ramp up over time and could end up costing considerably more in the long run.
It’s more difficult to secure a private loan, meaning you’ll need somebody with a long credit history and good credit scores to act as a co-signer for you.
Federal loans have clearly defined lending limits, but private loans are more flexible and may offer a much higher ceiling in the amount of debt you can incur. This can lead to over-borrowing, and in turn, that can lead to severe financial distress when it comes time to pay the loan off.
One good piece of news about both federal and private student loans is that they may be tax deductible depending on your particular situation. To get a deduction, a student must be enrolled at least half-time and meet certain income limits.
Most private student loans cannot be discharged in bankruptcy proceedings. In other words, if you take out a loan, you’re stuck paying it back unless you die or become permanently disabled.
Hoverson Law Offices serve clients in Minneapolis, Bloomington and other nearby Minnesota communities.