Preparing to go to college should be a fun time that is full of excitement for the future, but an important part of that future is being free of student loan debt. Many of the students that obtain student loans do not know much about them other than the loan is necessary to pay for their college education. There are some important things that every student should know about student loans before applying for one.
According to the Consumer Bankers Association, approximately 80% of private student loans have a cosigner, typically a parent or another relative. The co-signer demonstrates that they are willing to take responsibility for paying back the loan in the event that the student is unable to. Private lenders often recommend having an adult cosigner for a student loan, reasoning that students do not have much of a credit history, so a co-signer’s good credit rating can help secure a lower interest rate for the student for the loan.
Most lenders allow the cosigner to exit the contract if loan payments are made on time for the first 12 to 48 months and the graduate has excellent credit. The lender will review the student’s credit history for good standing with all other debts, including credit cards, car loans and rent payments, and the student will need to prove that their income is high enough to manage the monthly loan payments by themselves.
The cheapest student loan a college student can obtain is a government-sponsored subsidized Stafford loan. The interest rate is less than half the rate of an unsubsidized Stafford loan and the government will cover the interest payments while the student is in college and for the first six months after graduation. To be approved for a government-sponsored subsidized Stafford loan, students must demonstrate financial need and the maximum amount a dependent student can borrow in subsidized Stafford loans is $23,000.
Student loan debt can almost never be discharged in a bankruptcy. The federal government can garnish up to 15% of the borrower’s or cosigner’s wages until the student loan is paid off and private lenders can garnish up to 25% of the individual’s earnings. If the student defaults on a federal loan, the government can also intercept your income tax refunds, any future lottery winnings, and up to 15% of your Social Security benefits.