Student loans are often one of the first types of credit that people become familiar with. These loans are meant to pay for higher educational expenses such as tuition, room and board, and books and supplies. Unlike practically every other type of debt, however, there are very few restrictions or requirements that people have to meet in order to qualify for these loans. The main reason for this is that student loans cannot be discharged in a bankruptcy like other forms of debt.
There are two main types of student loans. Federal student loans are backed by the government, and tend to have lower interest rates than private student loans. Federal loans also have a few more restrictions on them, however, and many people find it difficult to qualify for them if their family income is too high or if they already have a high student loan balance. In these cases, many students turn to private student loans that are issued by banks. These banks tend to charge higher interest rates, but they typically do not look at factors such as family income, credit history, or current loan balance.
After graduating, former students typically have several different student loans. Payments on these loans will usually start within six to nine months of graduation. All students with federal student loans must attend a short class in which their payment obligations are explained to them. In the event that a student does not graduate, payments usually start within six months of him or her leaving school. Payments can be deferred in some cases, such as if a student decides to continue with his or her education.
Interest rates for federal loans are set by Congress each year. Most private banks set their interest rates based loosely on this rate. This means that the interest rate on a student loan can fluctuate over its lifetime. Because of this, many former students choose to consolidate their loans into a single loan with a single monthly payment.
It is important to note that federal law does not allow for student loans to be easily discharged in a bankruptcy. In fact, a former student has to prove that he or she has no hope of ever being able to repay the loan. Less than 1% of people who petition the court to have their student loans discharged during bankruptcy are able to do so.