Regarding student loans, there are two kinds of loans, federal loans and private loans (Josuweit, 2018). Loans offered by the government have fixed interest rates and provide different options for repayment. Besides, interest rates on government loans are fixed for a specified year. Private loans lack fixed interest rates and flexible repayment plans. Private lenders also provide variable or fixed interest rate packages, even though the rates depend on the creditworthy of the applicant.
As stated earlier, government loans have fixed interest rates for the life of the loan. For students who took loans for the 2017/2018 academic year, the interest rate for undergraduate students who received direct subsidized and unsubsidized Stafford loans is 4.45% while it is 6% for graduate students (The Pennsylvania State University, 2017).
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Repayment of loans begins after graduation or after a student drops below half-time admission. However, there is a single six month grace period before the beginning of the repayment. For the federal unsubsidized loan, students have the option of paying interest while they are studying or they can wait until the end of their enrolment. Paying the interest while in school is beneficial as it reduces the entire loan debt. However, the interest will capitalize and be added to the total amount to be repaid if payments are not made during the study period. There are different repayment plans and applicants can select the plan that harmonizes with their needs. The paid amount and the required time for repayment differ depending on the selected repayment plan. The typical repayment period range from 10-25 years.
The average default rate for loans was 11.5% ( Friedman, 2017 ). The greatest effect on credit score in relation to student loans is linked to payments. Payment history accounts for a substantial proportion of a credit score. A single late payment can lead to a low credit score.
References
Friedman, Z. (2017, October 06). Student Loan Defaults Rise - What To Do Now . Retrieved February 19, 2018, from https://www.forbes.com/sites/zackfriedman/2017/10/06/student- loan-default/#4f08ec4428de
Josuweit, A. (2018, January 17). Student Loan Changes You Need To Know For 2018 And Beyond . Retrieved February 17, 2018, from https://www.forbes.com/sites/andrewjosuweit/2018/01/17/student-loan-changes-you- need-to-know-for-2018-and-beyond/
The Pennsylvania State University. (2017, May 12). Federal Direct Loan Interest Rates . Retrieved February 17, 2018, from https://studentaid.psu.edu/types-of-aid/loans/interest- rates
