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Types of Student Loan; Risks and Rewards Reviewed

Last Updated on November 23, 2022 by Unwana Akpan

I will try my best to let you understand what a student loan is, the two major types of student loans, the advantages and disadvantages of each type.

What is loan per say?

The loan is money that a financial institution lends out to be repaid with interest.

What is a student loan?

A student loan is a loan offered to college students in order to help them fund their tuition fees, accommodation, and other living expenses. It can be offered by a private or government agency.

Types of student loans

We have two major types of student loans namely; federal student loans and private student loans.

1 Federal student loans

This type of loan is offered by the federal government of the country you intend to study in or your country of origin.

Types of federal student loan

  • Direct subsidized loans; this is a loan made to eligible undergraduate students who can prove they need support in order to complete their studies.
  • Direct unsubsidized loans; these are loans given to eligible undergraduates, graduates and professional students but you don’t need to prove that you need financial help.
  • Direct PLUS loans; these are loans given to graduates or professional students and parents of dependent undergraduate students. A credit check is required for this type of loan.
  • Direct consolidation loan; this type of federal loan allows you combine all your eligible federal student loans into a single loan with a single interest rate.

Advantages of Federal student Loans

  • It has a fixed and lower interest rate compared to private student loans.
  • You don’t need a cosigner
  • The repayment period is very flexible
  • Easy approval and no application fee or other charges
  • Flexible repayment plans
  • There are jobs you take up after school that can make the government to pardon part of your student loan.
  • You don’t have to start repayment until after school
  • Your income tax will reduce when you start repayment and even throughout the period
  • You won’t start making repayment until you have a job
  • If your income is not high enough, your monthly repayment amount can adjusted.

Disadvantages of Federal student loans

  • It is highly competitive because of being easy to get approval
  • You might not get a very high amount even after being proven eligible depending on the number of applicants that period.
  • You can risk accumulating much interest if you over enjoy the benefit of flexible payment plan.

2 Private student loans

This is a loan given to a college student by a bank or any other private financial organisation.

Advantages of private student loan

  • You are sure of getting the loan if you fulfill all righteousness
  • You can qualify for a reduction in interest rate if you choose an autopay option.

Repayment option

  • There is 6 months grace period after school before you start repayment although not all private loans offer this option.
  • Some private student loans offer deferment for the period you are in school.
  • Some loan organisations offer loan forbearance options especially while still in school.
  • Some loan institutions offer perks such as a reduction in the principal or interest rate if you make a final cgpa of 3.0 or higher.

Disadvantages of private student loans

  • You may incur some fees like loan application fee, late repayment fee or even loan origination fee.
  • You don’t stand a chance if you don’t meet all requirements.
  • You can risk high interest rates
  • You may be in for trouble if your period of grace is exceeded.
  • You will definitely need a cosigner if you are not an income earner.
  • Most of their interest rates are very variable
  • Borrowing more than your potential income immediately after school means repayment problem.

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