Study Loans: Di's Support For Education Dreams

Student loans are a common way for students to fund their education, with almost 60% of South African students applying for a study loan. Student loans can be taken out from a federal government or a private organisation, such as a bank, and are used to cover college and school-related expenses. Before taking out a student loan, it is important to research and understand the repayment plan, interest rates, and payment due dates.

Student loans 101: What they are and how they work

Student loans are a powerful tool that can help you pay for a college education that you otherwise might not be able to afford. They are a sum of money borrowed from a federal or private lender to pay for higher education. They can be used to cover the cost of tuition, textbooks, other school supplies, and basic living expenses.

How to get a student loan

To apply for a federal loan, students and their parents must fill out the Free Application for Federal Student Aid (FAFSA). This will determine how much financial aid they are eligible to receive, which could be in the form of student loans, grants, or federal work study. This information will appear in the student's college financial aid package. For private loans, you typically need to meet lender-specific criteria and undergo a credit check.

Understanding repayment

Student loans must be paid back with interest, and it is important to understand the repayment plan and due dates. The repayment period is usually fixed once the loan has been issued, and the repayments are usually split into two periods. The first period starts while you are still studying, and your parent, guardian, sponsor, or surety pays the interest. The second period begins after graduation, during which you must pay back the capital amount and interest. The loan issuer will allow a period of grace (usually 6 months) post-graduation for you to job hunt.

Things to consider

Student loans are a big commitment, and it is important to do your research and explore your options before taking one out. Understand your unique financial circumstances and work with the right loan provider to craft a repayment plan that suits your needs. If you are struggling to afford your student loan payments, reach out to your loan servicer to explain the situation and ask for assistance.

Interest rates: Fixed vs variable

When it comes to interest rates, you have the option of choosing between a fixed or variable rate for your study loan. Understanding the difference between these two types of interest rates is crucial before making a decision.

Firstly, it is important to note that federal student loans always have fixed interest rates. These rates are set by the government and remain static for the life of the loan. On the other hand, private student loans can offer either fixed or variable interest rates. Private lenders set their own interest rates, which can be adjusted over time.

A fixed-rate loan provides predictability and stability. With this option, you will know exactly what your interest rate will be from the time your loan is approved until your final payment. This can be beneficial if you prefer stable monthly payments and want to avoid the uncertainty associated with fluctuating interest rates.

In contrast, a variable-rate loan is more flexible and can be influenced by market conditions. Variable interest rates may start lower than fixed rates, but they can change over time as the market adjusts. This means your monthly payments can either increase or decrease depending on the economic climate. Variable rates are often tied to benchmarks such as the Federal Reserve interest rate or the London Interbank Offered Rate (LIBOR). More recently, lenders have been using the Secured Overnight Financing Rate (SOFR) to determine variable interest rates.

When deciding between a fixed or variable interest rate, consider factors such as your risk tolerance, loan term, economic outlook, and financial flexibility. If you are comfortable with some uncertainty and potential fluctuations in your monthly payments, a variable rate may be suitable. However, if you prefer the stability of knowing exactly what you will pay each month, a fixed-rate loan might be a better option. Additionally, shorter-term loans may be less risky with variable rates, as there is less time for interest rates to increase significantly.

It is also important to keep in mind that interest rates are just one aspect of a study loan. Other factors, such as repayment plans, grace periods, and eligibility requirements, should also be carefully considered when choosing a loan that best suits your needs and financial goals.

Federal vs private loans

Federal student loans are provided by the government, while private student loans are provided by banks, credit unions, and other financial institutions. Both federal and private student loans have to be paid back with interest, regardless of whether you graduate or not. However, interest rates on federal loans are generally lower than those on private loans.

To apply for a federal student loan, you need to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA takes into account factors such as the student's and parent's income, investments, and the number of children in college to determine eligibility for financial aid. Federal loans also offer more flexible repayment options, and there is no requirement for a credit check.

Private student loans, on the other hand, are not based on a borrower's financial needs. They usually offer a choice between fixed or variable interest rates. A fixed rate stays the same, providing predictable monthly payments, while a variable rate may fluctuate depending on the loan's index. Private loans may require a credit check, and if you have a poor credit history, you may need a co-signer. Private loans can be taken out by a student, parent, or creditworthy individual.

It is important to thoroughly research and understand the repayment plans and terms and conditions of both federal and private loans before making a decision.

How to apply for a student loan

Almost 60% of South African students apply for a study loan. Student loans are borrowed from a federal or private lender to pay for higher education. Before applying for a student loan, it is important to research and explore options to select one that suits your needs. It is also important to understand the repayment plan and payment due dates.

To apply for a student loan, you will need to provide basic personal and financial information. This includes documents that prove you are attending university, such as original and certified copies of your university admission letter and other relevant documents. You will also need to choose the type of interest rate and repayment plan you want for your loan. If you are applying with a cosigner, they will also need to provide their financial information.

There are different types of student loans available, including federal and private loans. Federal student loans are offered by the government and typically have lower interest rates than private loans. Private loans are offered by banks, credit unions, and other financial institutions and are based on your creditworthiness. If you have little or no credit history, you may want to consider a cosigner, which can increase your chances of approval and help you get a better interest rate.

To attain a student loan from a bank, a surety needs to apply on your behalf. The surety must earn over a certain amount per month and have a clear credit history. Each bank offers different repayment plans, so it is important to explore your options from major banks. There are also independent credit providers that focus specifically on study loans.

Repayment options and strategies

Federal Student Loans

Federal student loans are issued by the government and typically offer more protections, lower monthly payments based on income, fixed interest rates, and access to forgiveness, disability discharge, and debt relief programs. The U.S. Department of Education offers various loan programs, including direct subsidized loans, direct unsubsidized loans, direct PLUS loans, and direct consolidation loans. Federal loans also carry unique benefits like income-based repayment options and public service forgiveness. To apply for a federal student loan, you must fill out the Free Application for Federal Student Aid (FAFSA) and provide information about your financial situation.

Private Student Loans

Private student loans are offered by independent credit providers or banks and typically have higher interest rates than federal loans. Private loans may have fixed or variable interest rates, and the repayment period is usually fixed once the loan is issued. Some private companies that offer study loans include FUNDI and Helpmekaar Studiefonds.

Income-Driven Repayment (IDR) Plans

IDR plans are available for federal student loans and can reduce monthly payments based on income. These plans require annual renewals and may be a good option for those with low incomes or who cannot afford traditional repayment plans.

Standard Repayment Plan

This is the default plan for federal student loans, where a fixed amount is paid each month for the loan term, typically over 10 years. This plan usually results in the least amount of interest paid over time.

Graduated Repayment Plan

The graduated repayment plan starts with lower payments that gradually increase over time, usually every two years. This plan can ease the initial financial burden but may result in higher overall interest payments.

Lump Sum Payments

For borrowers with low loan balances relative to their income, making lump-sum payments or paying more than the minimum required each month can help reduce the loan balance quickly and minimize interest paid over time.

Minimum Payments

For borrowers who cannot realistically pay off their loans, making the minimum required payments under the cheapest repayment plan can help manage debt sustainably without focusing on early repayment. Federal student loans are discharged upon the borrower's death, so they do not pass on to beneficiaries.

Frequently asked questions