Going to college can be expensive, and there are four main avenues open to students to pay the bills. While students can work towards grants and scholarships, many people take out a federal or private student loan, with the expectation they will have to repay this at a later date. This means understanding the terms of the loan, both in how interest is handled, and the way credit scores will affect accessibility.
First, it’s important to remember that the majority of private loans will need borrowers either to have an extremely good credit score or to use the help of a co-borrower. Dr. Carrie Johnson, North Dakota State University's Assistant Professor of Personal and Family Finance, explained that the industry changed to focus on the creditworthiness of debtors when student loan defaults became more common. "This means that now most college students will need to have a co-signer," noted Johnson. "Each lender makes this decision as to who they lend to, but for traditional students without income or a credit history, they will not be able to obtain a private student loan without a co-signer."
Considering the various interest rates available is also important. For example, while a federal loan is offered with a fixed rate, variable rates are often applied to private loans. These might be low at the time of application, making the option of a cheaper loan seem attractive, but they can rise dramatically over time. As a result, it often makes a federal loan less expensive.
When applying for student loans, it's essential to understand the differences between federal and private options. Knowing these helps to start out with a good foundation for future repayments.
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