After scholarships and grants, the most common way students pay for their education is with student loans. There are two main types of student loans – federal loans and private loans.
Federal student loans are issued directly by the Department of Education or are guaranteed by the federal or state government. These loans are not dependent upon the creditworthiness of the student borrower. PLUS loans are the exception to this rule. When it comes time for repayment, there are numerous payment options, some based upon the income of the student borrower. This can mean a lower, more affordable payment. In addition, if a borrower defaults, there are programs to get out of default, and again, possibly making a lower, more affordable payment. Finally, federal student loan borrowers can, in some instances, take advantage of various loan forgiveness programs.
Private loans, on the other hand, are issued by private banks or lenders. These loans are based upon the student borrower’s credit, so you have to have good credit to get the loan. Private student loans, thankfully, make up only a small percentage of the outstanding student loan debt. When it comes time for repayment, it works much like a home loan with fixed payments over a term of years. The biggest problem with private student loans is that when the student borrower gets into trouble repaying the loans there are few, if any, options available.