What are some subtleties of student loans?

Student loans come in a variety of "flavors," which sometimes indicate different terms, repayment periods, delinquency issues, loan forgiveness clauses, and/or grace periods. As college approaches, all parents, guardians and prospective students should become familiar with these differences and evaluate the programs available.

For example, there is often confusion between federal and private student loans. Many believe they are identical, work the same way, and are granted and paid in the same manner, yet in reality they often operate quite differently. Subsidized and unsubsidized Federal student loans, while accomplishing the same goals, are legally and operationally different too.

Federal vs. private student loans

First, learn the rule-of-thumb: Federal student loans are usually your best choice. Private student loans are typically your worst choice. The primary reason: Interest rates . Federal loan interest rates are usually lower than private, or "alternative" student loan rates.

Federal loans offer other advantages, too. You might enjoy much more liberal – and easy – repayment terms. In some cases, interest doesn't even accrue while the student is still in school. Other federal student loans accrue interest during school, but require no repayment until your education is finished and you enter the workforce.

Subsidized vs. unsubsidized federal student loans

The major difference between these two types of loans is when interest begins to accrue (be charged). Subsidized student loans, awarded based on need, do not accrue interest while you're in school. Repayment is unnecessary until you've completed your education and begin your professional career. The Federal Government subsidizes your loan interest so the lender has earned income while you've been studying.

Unsubsidized Federal student loans, also given to you on a need basis, do accrue interest during your education period, but still do not require any repayment during this time. And although interest is accruing the rate is typically very low.

Another sometimes-important feature of Federal student loans becomes clear after your education is complete. Often, former students have a variety of Federal loans that they received over their college and/or graduate school years. As they enter the loan repayment phase, they sometimes face four, five, or even six monthly payments. While it's wonderful to begin earning the income that you worked so hard for in college, it can be burdensome to schedule and make so many monthly payments.

There is some good news for you, though. You can often perform a student loan consolidation that combines numerous monthly payments into just one. With the low interest that characterizes student loans, your repayment requirement should be manageable.

Student loan forgiveness

One of the most common subtleties of student loans and one of the least understood is loan forgiveness. Most people aren't even aware that there are some opportunities to have their student loans forgiven.

For example, the Teacher Student Loan Forgiveness Program rewards some teachers by providing for forgiveness of some or all of their student loans, depending on how much they owe. Perkins Loans, made to needy students by higher education institutions, also have a forgiveness provision for some students who work in specified public service capacities after graduation.

Student loan repayment plans

Another lesser-known feature of student loans is your ability to select a variety of repayment plans. The menu of options depends on the type of student loans you have. A number of options can make your loan repayment relatively painless with your new professional compensation level. Here are a few options available with some, but not all, student loans.

Standard repayment plans are those existing at the inception of your loans. Usually available up to ten years, you'll typically pay less total interest with this choice. Graduated plans allow you to start with low monthly payments that increase (usually every two years), to keep repayment affordable as you begin your full time career and payments then increase as your income grows.

For those of you who have heavily used student loans to finance your education, you might have the choice of an extended repayment plan. Often available if your loan balance total, before or after student loan consolidation, exceeds $30,000 (not an uncommon level), this option may allow you to amortize and pay your loan(s) for up to 25 years, to keep payments reasonable.

If your income is low or generally fluctuating, you might be eligible for an Income-based repayment plan. Typically recalculated annually, your monthly payment fluctuates with the rises and falls of your income and household financial situation.