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Editor’s Note: This story originally appeared on Living on the Cheap.
Are you considering taking out student loans for your or your children’s education?
It’s not a decision to be made lightly.
Following is the basic information you need to know.
Federal student loans aren’t always superior
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Long ago, private student loans were awarded in ridiculously high amounts and interest rates varied, meaning over a 10-year repayment period you could have a 4% interest rate at times and a 12% interest rate at other times.
Payments could not only top $1,000 monthly but also could also vary by hundreds of dollars because of the interest rate changes.
Now, private student loans are available at fixed interest rates that don’t change and are often less than the parent PLUS loan interest rate. Compare federal parent loan rates with rates granted by lenders such as SoFi.
There is a big difference between loans awarded to students and those awarded to parents
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Parent PLUS loan interest rates are higher than traditional undergraduate student loans, income-driven repayment plan prices are higher, and the only limit is the cost of attendance.
For instance, let’s say a school costs $30,000 per year to attend including room and board, textbooks, etc. The limit for dependent undergraduates for the first year is $5,500.
If the parents qualify, they can borrow much more, up to the full cost of attendance minus all other student aid. Thus, a parent could easily end up with $100,000 in debt from a child’s undergraduate degree.
Credit rating and income determines eligibility for private student loans
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Whether a private loan is to parents or students, credit rating and income do matter. Students getting a loan in their name with limited credit history may get loans with a parent or other more credit-established co-signer.
A co-signer is someone who agrees to repay the loan if the primary borrower can’t. Thus, they are equally responsible for the loan, and the loan payment history also goes on the co-signer’s credit report.
Credit rating may also determine interest rate. For instance, someone with a better credit score may qualify for an interest rate that is two percentage points or more lower than another person’s with a lower credit score.
There are different types of federal student loans
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For students, most federal student loans are either issued as subsidized or unsubsidized …….